Problem
Case 4 Non-current liabilities
LowTolerance Ltd. is a Canadian public corporation that manufactures high-precision tools used by companies in the semiconductor industry. Recently, demand for LowTolerance's tools has been on the rise, and the company is looking to expand its business. The company did not have the cash needed for the expansion; to raise capital, management issued bonds to the public. On August 1, 2021, it sold $8,000,000 of five-year bonds at 92.46. The bonds have a stated interest rate of 9%, and pay interest semi-annually on January 31 and July 31. The company incurred direct costs related to the issue of the bond (e.g., legal and accounting fees and the investment banker's commission) of $280,010.
On August 1, 2025, LowTolerance retired 30% of the bonds. At that time the bonds' market price was $99.
Task
1. What were the gross proceeds from the bond issue? What interest rate did the investors require on the bonds? What were the net proceeds from the bond issue?
2. Another bond of LowTolerance Ltd. is traded based on a market rate of 10%. Is the rate on both bonds the same? If not, what might cause the difference?
3. IFRS mandates the use of the effective interest method for determining interest expense. In your opinion, what might be the problem(s) with the use of the straight-line method?
4. Work out the journal entry for the issuance of the bonds on August 1, 2021.
5. Work out the original bond amortization schedule-do not include the partial redemption on August 1, 2025.
6. Calculate the gain or loss on the partial bond retirement on August 1, 2025, and work out the journal entry to record this event.