Question

(Conversion of Bonds) Aubrey Inc. issued \(4,000,000 of 10%, 10-year convertible bonds on June 1, 2017, at 98 plus accrued interest. The bonds were dated April 1, 2017, with interest payable April 1 and October 1. Bond discount is amortized semi-annually on a straight-line basis.On April 1, 2018, \)1,500,000 of these bonds were converted into 30,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a) Prepare the entry to record the interest expense at October 1, 2017. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)

(b) Prepare the entry(ies) to record the conversion on April 1, 2018. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made

Short answer

a. Interest payable and interest expense will be debited. Discount on bonds payable and cash will be credited.

b. Bonds Payable and Interest Expense will be debited. Discount on Bonds Payable and Cash will be credited.

Step-by-step solution

Journal entry and calculation of (a)

Date	Transactions	Debit	Credit
	Interest Payable ($200,000 X 2/6)	$66,667
	Interest Expense ($200,000 X 4/6) + $2,712	$136,045
	Discount on Bonds Payable		$2,712
	Cash ($4,000,000 X 10% ÷ 2)		$200,000

Calculations:
Par value	$4,000,000
Issuance price	(3,920,000)
Total discount	$80,000
Months remaining (10 years x 12 months- 2 months of Nov. and Dec. )	118
Discount per month ($80,000 ÷ 118)	$678
Discount amortized (4 X $678)	$2,712

Journal entry and calculation of (b)

Date	Transactions	Debit	Credit
	Bonds Payable	$1,500,000
	Interest Expense ($200,000 X 4/6) + $2,712		$27,458
	Common stock (30,000 x $20)		$600,000
	Cash (Bal. figure)		$872,542

Calculations:
Discount related to 3/8 of the bonds ($80,000 X 3/8)	$30,000
Less: Discount amortized [($30,000 ÷ 118) X 10]	$2,542
Unamortized bond discount	$27,458