Stone Industries

ACCOUNTING CASE STUDY

Group 9
Ashmeet Singh
Akshay Kumar Singh
Himani Sharan
Aaditya Dhama
Manohar Kumar
VaibhavSaraf

Bond Discount Amortization

Schedule

Interest Paid

Period
Beginning Book
Value

Discount
Amortization

Interest
Expense

Ending Book
Value

$3,702,4 52

$111,074

$100,000

$11,074

$3,713,526

3,713,526

111,406

$100,000

11,406

3,724,932

3,724,93 2

111,748

$100,000

11,748

3,736,680

3,736,6 80

112,100

$100,000

12. MX)

3,748,780

3,748,780

112,463

$100,000

12,463

3,761,243

3,761,243

112,837

$100,000

12,837

3,774,080

Answers To Questions
1.A

The bond accounting is such that:

At the time of issuance, Cash and Bonds Payable (net) increase by the same amount
(proceeds per bond, ignoring issuance costs)
At maturity, Cash and Bonds Payable decrease by the same amount ($1,000 per bond)
The amortization of discount or premium, using the compound interest method,
systematically changes the Bonds Payable amount from the amount of proceeds to the
amount of the face value, and does so in a way such that the interest rate reflected in the
issuer's bond interest expense is constant throughout the life of the bond.
1.B

At the time of proposed refunding of the old bonds, the market interest rate is said to be 10 percent.
Thus, a 10 percent coupon bond should have a market value equal to its face value This would be an
issuance price of $1,125 ($1,124,622) per bond, as calculated above. Multiplied by 4.000 bonds, the
total is $4,498,000.

2.A
Since the book value at December 31. 20x2, is $3,774,080 and the expected reacquisition cost is
$3,000,000, then the gain on retirement of the bonds is $774,080. The validity of Stone's and
Edwards's mouth-watering anticipation of the stock market's reaction to Stone's reporting increased
profits is dubious. The separate importing shows the "book-balancing" result of a questionable
financial decision (refinancing 5-percent debt), but does not enhance ongoing income results. In
fact, ongoing results will be worse because of higher interest expense on the new bonds.

2.B
The gain on the retirement of the old bonds is the same, irrespective of the vehicle used as the
source of funds to finance the retirement.

2.C
Next Slide

The journal entry to retire this bond, assuming the cash required was $3,000,000 is as
follows:
Bond Payable

4000

Cash

3,000,000

Bond Discount

225,920

Gain on Bond Retirement

774,080

The entry recording issuance of the 12 percent coupon bond with proceeds of
$4,498,000 would be as follows:
Cash

4498000

Bonds Payable

4000000

Bonds Premium

498000

Thus. Cash went up by $1,498,000, liabilities increased by $723,920 and Retained Earnings
went up by $774,080. Hence, the current ratio will be altered (improved) by this
transaction.

3.
There will be a net increase in cash on January 1. 20x3, of $1,498,000. Every six months,
starting with June 30. 20x3, Stone's cash flow would decrease by $140,000. relative to
what it would have been without refunding the original bonds: the old bonds had a
semiannual interest payment of $100,000 (4.000 bonds @ $25) and the new ones have a
semiannual payment of $240,000 (4.000 bonds @ $60). Combining the initial $1,498,000
cash increase and six net decreases of $140,000. by December 31. 20x5. the company will
still be $658,000 ahead in net cash flow associated with its bonds.

Thank You