Spring Water Company Ltd needed to raise 50 million of
Spring Water Company Ltd. needed to raise $50 million of additional capital to finance the expansion of its bottled water facility. After consulting an investment banker, it decided to issue bonds. The bonds had a face value of $50 million and an annual interest rate of 4.5%, paid semi-annually on June 30 and December 31, and will reach maturity on December 31, 2026. The bonds were issued at 96.1 on January 1, 2016, for $48,050,000, which represented a yield of 5%.
a. Spring Water Company issued bonds with a face value of $50 million because it wanted to raise $50 million. However, it succeeded in raising only $48,050,000. Identify and explain two possible reasons why investors were not willing to pay $50 million for the bonds.
b. Show the journal entry to record the issuance of the bonds.
c. Show the journal entries to record the first two interest payments.
d. What amount will be reported on the statement of financial position at the end of the first year related to these bonds?
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