On January 1, 2012, Glover Corporation issued $2,400,000 of 5-year, 8% bonds at 95. The bonds pay interest semiannually on July 1 and January 1. By January 1, 2014, the market rate of interest for bonds of risk similar to those of Glover Corporation had risen. As a result, the market value of these bonds was $2,000,000 on January 1, 2014—below their carrying value. Joanna Glover, president of the company, suggests repurchasing all of these bonds in the open market at the $2,000,000 price. To do so, the company will have to issue $2,000,000 (face value) of new 10-year, 11% bonds at par. The president asks you, as controller, “What is the feasibility of my pro-posed repurchase plan?”

Instructions

With the class divided into groups, answer the following.

(a) What is the carrying value of the outstanding Glover Corporation 5-year bonds on January 1, 2014? (Assume straight-line amortization.)

(b) Prepare the journal entry to redeem the 5-year bonds on January 1, 2014. Prepare the journal entry to issue the new 10-year bonds.

(c) Prepare a short memo to the president in response to her request for advice. List the economic factors that you believe should be considered for her repurchase proposal.