(Entries for Conversion, Amortization, and Interest of Bonds) Counter Inc. issued $1,500,000 of convertible 10-year bonds on July 1, 2007. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $34,000, which is being amortized monthly on a straight-line basis.
The bonds are convertible after one year into 8 shares of Counter Inc.’s $100 par value common stock for each $1,000 of bonds.
On August 1, 2008, $150,000 of bonds were turned in for conversion into common. Interest has been accrued monthly and paid as due. At the time of conversion any accrued interest on bonds being converted is paid in cash.
Hint: (LO 1)
Instructions
Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates.
a.
August 1, 2008. (Assume the book value method is used.)
b.
August 31, 2008.
c.
December 31, 2008, including closing entries for end-of-year.
(a) Entries at August 1, 2008
Bonds Payable………………………………………………………………………… 150,000
Discount on Bonds Payable (Schedule 1)…………………………. 3,032*
Common Stock (8 X 150 X $100)……………………………………. 120,000
Paid-in Capital in Excess of Par……………………………………… 26,968**
(To record the issuance of 1,200 shares
of common stock in exchange for
$150,000 of bonds and the write-off of
the discount on bonds payable)
*($34,000 X 1/10) X (107/120)
**($150,000 – $3,032) – $120,000
Interest Payable………………………………………………………………………. 1,500
Cash ($150,000 X 12% X 1/12)……………………………………….. 1,500
(To record payment in cash of interest
accrued on bonds converted as of
August 1, 2008)
(b) Entries at August 31, 2008
Bond Interest Expense……………………………………………………………. 255*
Discount on Bonds Payable (Schedule 1)………………………… 255
(To record amortization of one month’s
discount on $1,350,000 of bonds)
*($34,000 X 90%) X (1/120)
Bond Interest Expense……………………………………………………………. 13,500
Interest Payable ($1,350,000 X 12% X 1/12)…………………… 13,500
(To record accrual of interest for August
on $1,350,000 of bonds at 12%)
(c) Entries at December 31, 2008
(Same as August 31, 2008, and the following closing entry)
Income Summary…………………………………………………………………… 175,756
Bond Interest Expense*…………………………………………………. 175,756
(To close expense account)
*($3,256 + $172,500)
Schedule 1
Monthly Amortization Schedule
Unamortized discount on bonds payable:
Amount to be amortized over 120 months $34,000
Amount of monthly amortization ($34,000 ÷ 120) $283
Amortization for 13 months to July 31, 2008 ($283 X 13) $3,679
Balance unamortized 7/31/08 ($34,000 – $3,679) $30,321
10% applicable to debentures converted 3,032
Balance August 1, 2008 $27,289
Remaining monthly amortization over remaining 107 months $255
Schedule 2
Interest Expense Schedule
Amortization of bond discount charged to bond interest expense in 2008 would be as follows:
7 months X $283.00 $1,981
5 months X $255.00 1,275
Total $3,256
Interest on Bonds:
12% on $1,500,000 $180,000
Amount per month ($180,000 ÷ 12) $15,000
12% on $1,350,000 $162,000
Amount per month ($162,000 ÷ 12) $13,500
Interest for 2008 would be as follows:
7 months X $15,000 $105,000
5 months X $13,500 67,500
Total $172,500
Total interest
Amortization of discount $ 3,256
Cash interest paid 172,500
Bond interest expense $175,756
