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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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