Wimberley Industries has a $10 million bond payable outstanding. The bonds were sold on February 1, 2005, with a ten-year term and a stated interest rate of 12 percent. Bond interest is paid semiannually on February 1 and August 1. The bonds have a current carrying value of $9,877,000. If Wimberley sold bonds in today’s market, the company would be required to pay annual interest of only 9 percent. Consequently, the company’s management wants to retire its outstanding bonds and sell new bonds. The current market price of Wimberley’s bonds is 122 1/4.
Required:
(a) At the present market price, how much will it cost Wimberley to purchase all of its outstanding bonds? What factor or factors may account for the difference between the collective market price and carrying value of Wimberley’s bonds?
(b) Suppose that Wimberley purchases and immediately retires the bonds. Prepare the appropriate journal entry to record this transaction.
(c) What stipulation could have been included in the bond indenture that would have allowed the company to retire the bonds without being forced to purchase them in the open market?