(Conversion of Bonds) Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1, 2007, at 98 plus accrued interest. The bonds were dated April 1, 2007, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.
On April 1, 2008, $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.
Hint: (LO 1)
Instructions
a.
Prepare the entry to record the interest expense at October 1, 2007. 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, 2008. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.
(a) 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 118
Discount per month $678
($80,000 ÷ 118)
Discount amortized $2,712
(4 X $678)
(b) Bonds Payable…………………………………………………………………… 1,500,000
Discount on Bonds Payable…………………………………………. 27,458
Common Stock (30,000 X $20)……………………………………. 600,000
Paid-in Capital in Excess of Par………………………………….. 872,542*
*($1,500,000 – $27,458) – $600,000
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
