On 1 January 2016, Mall Ltd issued $1 200 000 of 5-year, 10% debentures at 93; the debentures pay interest half-yearly on 1 July and 1 January. By 1 January 2018, the market rate of interest for debentures of risk similar to those of Mall Ltd had risen. As a result the market value of these debentures was $1 000 000 on 1 January 2018 — below their carrying amount of $1 144 000. 

Jenny Payne, managing director of the Mall Ltd, suggests repurchasing all of these debentures in the open market at the $1 000 000 price. But to do so Mall Ltd will have to issue $1 000 000 (face value) of new 5-year, 17.36% debentures at face value. The managing director asks you as chief accountant: ‘What is the feasibility of my proposed repurchase plan?’ 

Required

With the class divided into groups, answer the following:

(a) Prepare the journal entry to redeem the 5-year debentures on 1 January 2018. Prepare the journal entry to issue the new 10-year debentures.

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