Chapter 22, Problem 1CP

CHALLENGE PROBLEM

This problem challenges you to apply your cumulative accounting knowledge to move a step beyond the material in the chapter.

On April 1, 20-1, Rebound Co. issued $300,000 of 10%, 10-year bonds, callable at 105 after three years, at face value. On April 1, 20-4, after completing three years of interest payments on the bonds, Rebound is considering calling the bonds and issuing $300,000 of new 8%, 10-year bonds at face value. The current market interest rate is only 8%, so Rebound thinks it might save money by taking this action.

REQUIRED

1. Compute the net savings to Rebound over the life of the original bond issue if it calls the old bonds and issues the new bonds.

2. Assuming Rebound calls the original bond issue, prepare the journal entry for the bond redemption.