(Conversion of Bonds) The December 31, 2007, 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, 2013) $500,000
Discount on bonds payable 10,240 $489,760
On March 5, 2008, 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 the book value method.
Interest Expense…………………………………………………………………………….. 25,640
Discount on Bonds Payable……………………………………………………. 640
[$10,240 ÷ 64 = $160; $160 X 4]
Cash (10% X $500,000 X 1/2)………………………………………………… 25,000
(Assumed that the interest accrual was
reversed as of January 1, 2008; if the interest
accrual was not reversed, interest expense
would be $17,307 and interest payable would
be debited for $8,333)
Bonds Payable……………………………………………………………………………….. 500,000
Discount on Bonds Payable ($10,240 – $640)………………………….. 9,600
Common Stock ($25 X 6 X 500)……………………………………………… 75,000
Paid-in Capital in Excess of Par…………………………………………….. 415,400*
*($500,000 – $9,600) – $75,000
