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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

Expert verified

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

01

(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

02

(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

03

(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

04

(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

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Most popular questions from this chapter

GROUPWORK (Entries for Various Dilutive Securities) The stockholdersโ€™ equity section of Martino Inc. at the beginning of the current year appears below.

Common stock, \(10 par value, authorized 1,000,000

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of parโ€”common stock 600,000

Retained earnings 570,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at \(32. The rights were void after 30 days. The market price of the stock at this time was \)34 per share.

2. The company sold to the public a \(200,000, 10% bond issue at 104. The company also issued with each \)100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at \(30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at \)8.

3. All but 5,000 of the rights issued in (1) were exercised in 30 days.

4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing.

5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives.

The company, using a fair value option-pricing model, determines that each option is worth \(10. The option price is \)30.

The options were to expire at year-end and were considered compensation for the current year.

6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

(a) Prepare general journal entries for the current year to record the transactions listed above.

(b) Prepare the stockholdersโ€™ equity section of the balance sheet at the end of the current year. Assume that retained earnings

at the end of the current year is $750,000.

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.

At December 31, 2017, Reid Company had 600,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 200,000 of which were issued on October 1, 2017. Net income for 2017 was \(2,000,000, and dividends declared on preferred stock were \)400,000. Compute Reidโ€™s earnings per common share. (Round to the nearest penny.)

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.

Accounting, Analysis, and Principles

On January 1, 2016, Garner issued 10-year, \(200,000 face value, 6% bonds at par. Each \)1,000 bond is convertible into 30 shares of Garner \(2 par value common stock. The company has had 10,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2017. (Ignore all tax effects.)

Accounting

(a) Prepare the journal entry Garner would have made on January 1, 2016, to record the issuance of the bonds.

(b) Garnerโ€™s net income in 2017 was \)30,000 and was \(27,000 in 2016. Compute basic and diluted earnings per share for Garner for 2017 and 2016.

(c) Assume that 75% of the holders of Garnerโ€™s convertible bonds convert their bonds to stock on June 30, 2018, when Garnerโ€™s stock is trading at \)32 per share. Garner pays $50 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.

Analysis

Show how Garner will report income and EPS for 2017 and 2016. Briefly discuss the importance of GAAP for EPS to analysts evaluating companies based on price-earnings ratios. Consider comparisons for a company over time, as well as comparisons between companies at a point in time.

Principles

In order to converge GAAP and IFRS, the FASB is considering whether the equity element of a convertible bond should be reported as equity. Describe how the journal entry you made in part (a) above would differ under IFRS. In terms of the accounting principles discussed in Chapter 2, what does IFRS for convertible debt accomplish that GAAP potentially sacrifices? What does GAAP for convertible debt accomplish that IFRS potentially sacrifices?

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