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(Conversion of Bonds) The December 31, 2017, balance sheet of Kepler Corp. is as follows.10% callable, convertible bonds payable (semiannual interest dates April 30 and October 31; convertible into 6 shares of \(25 par value common stock per \)1,000 of bond principal; maturity date April 30, 2023) \(500,000Discount on bonds payable 10,240 \)489,760On March 5, 2018, Kepler Corp. called all of the bonds as of April 30 for the principal plus interest through April 30. By April 30, all bondholders had exercised their conversion to common stock as of the interest payment date. Consequently, on April 30, Kepler Corp. paid the semiannual interest and issued shares of common stock for the bonds. The discount is amortized on a straight-line basis. Kepler uses book value method.

Prepare the entry(the ies) to record the interest expense and conversion on April 30, 2018. Reversing entries were made on January 1, 2018. (Round to the nearest dollar.)

Short Answer

Expert verified

To record interest expense, Interest Expense will be debited by $25,640 and discount on bonds payable will be debited by $640, and cash will be credited by $25,000.

To record conversion, bonds payable will be debited by $500,000 and discount on bonds payable will be credited by $9,600, common stock by $75,000, and paid in capital in excess of par by $415,400.

Step by step solution

01

Journal entry to record interest expense

Date

Accounts and Explanations

Debit

Credit

Interest Expense

$25,640

Discount on Bonds Payable ($10,240 ÷ 64 = $160); ($160 X 4)

$640

Cash (5% X $500,000)

$25,000

Being the interest expense recorded

02

Journal entry to record conversion

Date

Transactions

Debit

Credit

Bonds payable

$500,000

Discount on Bonds Payable ($10,240 -$640)

$9,600

Common stock ((500000 / 100) x 6 x $25)

$75,000

Paid-in capital in excess of par (bal. fig.)

$415,400

Being bonds payable converted into common stock

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Most popular questions from this chapter

Which of the following statements is correct?

a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

b) Both IFRS and GAAP assume that when there is a choice of settlement of an option for cash or shares, share settlement is assumed.

c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.

d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

All of the following are key similarities between GAAP and IFRS with respect to accounting for dilutive securities and EPS except:

(a) the model for recognizing stock-based compensation.

(b) the calculation of basic and diluted EPS.

(c) the accounting for convertible debt.

(d) the accounting for modifications of share options, when the value increases.

Bridgewater Corp. offered holders of its 1,000 convertible bonds a premium of \(160 per bond to induce conversion into shares of its common stock. Upon conversion of all the bonds, Bridgewater Corp. recorded the \)160,000 premium as a reduction of paid-in capital. Comment on Bridgewater’s treatment of the $160,000 “sweetener.”

How is antidilution determined when multiple securities are involved?

Douglas Corporation had 120,000 shares of stock outstanding on January 1, 2017. On May 1, 2017, Douglas issued 60,000 shares. On July 1, Douglas purchased 10,000 treasury shares, which were reissued on October 1. Compute Douglas’s weighted-average number of shares outstanding for 2017.

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