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(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

Expert verified

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

01

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

02

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

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Most popular questions from this chapter

Question: Archer Company issued \(4,000,000 par value, 7% convertible bonds at 99 for cash. The net present value of the debt without the conversion feature is \)3,800,000. Prepare the journal entry to record the issuance of the convertible bonds.

(EPS with Options, Various Situations) Venzuela Company’s net income for 2017 is \(50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016, each exercisable for one share at \)6. None has been exercised, and 10,000 shares of common were outstanding during 2017. The average market price of Venzuela’s stock during 2017 was \(20.

Instructions

(a) Compute diluted earnings per share. (Round to nearest cent.)

(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was \)20.

(Issuance of Bonds with Warrants) Illiad Inc. has decided to raise additional capital by issuing \(170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each \)100 bond sold. The value of the bonds without the warrants is considered to be \(136,000, and the value of the warrants in the market is \)24,000. The bonds sold in the market at issuance for $152,000.

Instructions

(a) What entry should be made at the time of the issuance of the bonds and warrants?

(b) If the warrants were nondetachable, would the entries be different? Discuss.

Question: (Issuance of Bonds with Stock Warrants) On May 1, 2017, Friendly Company issued 2,000 \(1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined.

Instructions

(a) Prepare the entry to record the issuance of the bonds and warrants.

(b) Assume the same facts as part (a), except that the warrants had a fair value of \)30. Prepare the entry to record the issuance of the bonds and warrants.

Discuss the similarities and the differences between convertible debt and debt issued with stock warrants.

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