Question

Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2018. (c) March 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method

Short answer

Answer

(a) Bond Interest Expense and Premium on Bonds Payable will be debited. Cash will be credited.

(b) Bonds Payable and Premium on Bonds Payable will be debited. Common Stock and Paid-in Capital in Excess of Par will be credited.

(c) Bond Interest Expense, Premium on Bonds Payable, Bond Interest Payable and Bonds Payable will be debited. Premium on Bonds Payable, Common Stock and Paid-in Capital in Excess of Par will be credited.

(d) Bond Interest Expense, Premium on Bonds Payable, and Bond Interest Payable will be debited. Cash will be credited.

Step-by-step solution

(a) Journal entry

Date	Description	DEBIT	CREDIT
December 31, 2018	Bond Interest Expense	$156,000
	Premium on Bonds ($80,000 x 1/20)	$4,000
	Cash ($4,000,000 X 8% X 6/12)		$160,000
	Being interest expense recorded

(b) Journal Entry

Date	Description	DEBIT	CREDIT
January 1, 2019	Bonds Payable	$400,000
	Premium on Bonds (64,000*10%)	$6,400
	Common Stock [8 X $100 X ($400,000/$1,000)]		$320,000
	Paid-in Capital in Excess of Par (80,000+6,400)		$86,400
	Being bonds are converted into common stock

(c) Journal entry

Date	Description	DEBIT	CREDIT
March 31, 2019	Bond Interest Expense	$7,800
	Premium on Bonds [(6400/8) x 3/12]	$200
	Bond Interest Payable (400,000 x 8% x 3/12)		$8,000
	Being interest expense are recorded
	Bonds Payable	$400,000
	Premium on Bonds Payable (6400-200)		$6,200
	Common Stock		320,000
	Paid-in Capital in Excess of Par		86,200
	Being $400,000 of debentures are converted on March 31, 2019

(d) Journal entry

Date	Description	DEBIT	CREDIT
June 30, 2019	Bond Interest Expense	$124,800
	Premium on Bonds Payable (80,000 x 80% x 1/20)	$3,200
	Bond Interest Payable (400,000 x 8% x 1/4)	$8,000
	Cash [(3,200,000 x 8% x 1/2) +8000]		$136,000
	Being interest on bonds payable paid