Question

(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

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

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

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