Hi! I need help with the following long-term debt question:
On January 1st 2004, Monitor Corporation issued 20-year bonds with face value $1,000,000 and stated interest rate 8%. The bond will mature on December 31st 2023. The interest payments are due on December 31st of each year. When the bonds were issued, the market interest rate for the bonds was 10%. The bonds were therefore issued to yield 10%. The costs associated with bond issuance were $20,000. According to FASB rules, the company has to capitalize the costs and then amortize it over the life of the bond.
The company's fiscal year ends on December 31st. The tax reporting method for the bond is the same as the financial reporting method. The tax rate is 40%.
1. Prepare the journal entries the company made on January 1st 2004 to record the issuance of the bond.
2. Prepare the journal entries the company made for the bond on December 31st of 2004.
3. On January 1st 2010, the company decides to extinguish the bonds by purchasing it from the open market. The market interest rate for this type of bonds (same credit rating, mature on December 31st 2023) is now 6%. Prepare the journal entries to account for the extinguishment of debt on January 1st 2010.
4. On January 1st 2010, instead of extinguishing the bond by purchasing it in the open market as in part 3, the company refunds the bond by issuing a new bond. The new bond is issued at 102 with face value $1,000,000 and stated interest rate 7%.