To: Chief Executive Officer- JJW Industries
From: Company’s Account Controller
CC: JJW Industries Executive
Date: December 2016
In this case, bonds are debt instrument and the company is the borrower who issues to the lenders who are the holder of the bond.Further, it is used as a security under which the company owes the holders a debt. In this sense, depending on the terms of the bond, the company is obliged to pay the debt interest or coupon. The company will have to pay the principal at a later date which is at maturity. The interest of the bond is payable on a regular fixed interval semiannual, monthly or annual. It will also be possible to negotiate for the bond, and the holder will be able to transfer it to the secondary market. Bonds with interest rate are preferable than those who do not carry any coupon. The reason is that the partial interest is payable on a regular basis rather than lump sum.
The bonds which do not have an interest rate attached to them require the company to pay an of lump sum money including the principal at maturity. The company will accrue with some advantages of using bonds rather than other securities. For instance, once JJW industries have issued the bonds, volatility is very low compared to stocks. In other words, bonds are safer instruments of raising debts compared to the equities. In some cases, the interest payments may be lower than the dividends which would have been paid for the equities. The on credit on the bonds is tax deductibles. Hence, by issuing zero coupon bonds, the proceeds from the sale of bonds will the difference between the current and maturity face value. In this sense, the company assumes the positive time value of money. At maturity, the face value of the bond will be higher than the current price of the bonds. If the interest is 10%, the proceeds of the bond will be equal to $10,000 per year. At the maturity, the value will be equal to the total interest of $100,000 plus $100,000 the face value of the bond. If the interest payment is five years, the total proceeds will be equal to $50,000 plus $100,000 the face value at maturity. In case the interest payment is made annually, at maturity the company will only pay the face value of $100,000.
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Selling of bonds is a form of loan or obligation for the company. The loan is payable by the company or borrower at maturity. Though bonds may differ at maturity and unless the holders redeem before maturity, they get all the proceeds from the bond. The bonds issued for a short term mature within several years. However, the long-term bonds may mature after 10-30 years. In other words, the longer the maturity period, the higher the total interest payment to the holder. The lenders willing only are willing to purchase the bonds at a higher price due to the riskiness of the bond than any other money market account. Therefore, the company should consider the interest type attached to the long-term debts. The interest can either be fixed or adjustable. If the interest is adjustable, they will have a fixed initial payment after which it rises or falls based on the type of market. Another factor to consider is the terms of the long-term debt. It is the duration for the payment of the loans.
The short term loans will have lower interest rates compared to the long term loans. Though, short-term loans may have a higher monthly payment but lower overall costs. When determining the loan interest, it is essential to consider the market-based factors. For instance, small markets will likely to have higher interest rates due to less intense competition. Further, because the loan market are illiquid and the overall loan volume is low. It is important to assess the type of market in which JJW industries operates and adjust the interest rate accordingly.
To: BOD- Damijo Company
From: Chief Accounting Officer
CC: Damijo Company Executive
Date: December 2016
Using cost method of repurchasing shares, it ignores the par value and the amount which were originally issued to the investors. The treasury shares represent shares which are bought back by the company which had issued. When the shares are reissued, the stock account is credited with the cost of purchase. Additionally, the cash account is debited with the actual amount received. The par value method after the shares is reissued debited on the stock account at par value of the shares. Similarly, the cash proceeds received are recorded on credit with the actual amount recorded in the treasury. Further, unlike the cost method, the par value method the shares acquired at one point in future will be retired. Thus, the par value method is preferred than cost method. The method differentiates between the actual shares retired and the outstanding shares.
