On December 31, 20X0, Limestone Charters issued $20 million of 10-year, 12% debentures. Interest is paid semiannually.

Question:

On December 31, 20X0, Limestone Charters issued $20 million of 10-year, 12% debentures. Interest is paid semiannually. The market interest rate at issuance was 14%. One year later, on December 31, 20X1 (after all interest payments and amortization had been recorded for 20X1), the company purchased all the debentures for $19 million. Throughout their life, the debentures had been held by a large insurance company.

Show all amounts in thousands of dollars. Round to the nearest thousand.

1. Compute the gain or loss on early extinguishment.

2. By using the balance sheet equation, present an analysis of the December 31, 20X1, transaction on the issuer’s books.

3. Show the appropriate journal entry.

4. At what price on December 31, 20X1, could Limestone Charters redeem the bonds and realize a $1,000,000 gain?

Debentures
Debenture DefinitionDebentures are corporate loan instruments secured against the promise by the issuer to pay interest and principal. The holder of the debenture is promised to be paid a periodic interest and principal at the term. Companies who... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...