Refer to P14–6 and Taylor Corp.
On April 1, 2012, Taylor Corp. sold 12,000 of its $1,000 face value, 15-year, 11% bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2013, Taylor took advantage of its favourable share prices to extinguish 3,000 of the bonds by issuing 100,000 shares. At this time, the accrued interest was paid in cash to the bondholders whose bonds were being extinguished. The company’s shares were selling for $31 per share on March 1, 2013.
Instructions
Repeat the Instructions of P14–6 assuming that Taylor Corp. uses the effective interest method. Provide an effective interest table for the bonds for two interest payment periods. (Hint: it will be necessary to first calculate the effective interest rate on the bonds).
(a) April 1, 2012: issuance of the bonds
(b) October 1, 2012: payment of the semi-annual interest
(c) December 31, 2012: accrual of the interest expense
(d) March 1, 2013: extinguishment of 3,000 bonds by the issuance of common shares (no reversing entries are made)