Question

1. On February 1, 2018, Ellison Co. issued eight-year bonds with a face value of $10,000,000 and a stated interest rate of 7%, payable semiannually on July 1 and January 1. The bonds were sold to yield 8%. The bonds are callable at 101 and convertible.

1. The issue price of the bonds is
2. Record the journal entries for February 2018 at issuance and July 1.

2. Using the information above, assume that the bonds issued by Ellison Co. are convertible with each $1,000 convertible into 25 shares of common stock.    Assume that Ellison converts $5,000,000 of bonds on July 1, 2020 into common stock. Prepare the following entries:

a. Entry at February 1, 2018 for issuance of the convertible bonds

b. Entry at July 1, 2020 for the conversion of $5,000,000 of bonds.

3. Using the information above, assume that the remaining bonds are called on December 31, 2020.

Answer 1

1.(a) Issue Price = Present value of lumpsum + Present value of payments

Present value of 10,000,000 due in 8 years = $53,39,082

(n=16,r=7%/2=3.5%)

(Interest payment = 10,000,000 *3.5% = $350,000)

Present value of semiannual $350,000 interest payments = $46,60,918

Total = 10,000,000

(b) journal entries for February 2018 at issuance and July 1-

At the time of issuance ,

Feb 2018 Cash a/c $10,000,000

Bonds payable a/c $10,000,000

At the time of interest payable,

July 1 Bond interest expense a/c $350,000

Cash a/c $350,000

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2. $1000 bonds = 25 Shares ,Then $10,000,000 bonds = 250,000 shares,$5,000,000 bonds =125000 shares

(a)Entry at February 1, 2018 for issuance of the convertible bonds -

Feb 1,2018 Cash a/c      $ 10,100,000

Bonds Payable a/c $10,000,000

Share Premium $100,000

(b) July 1, 2020    Bonds Payable a/c $5,050,000

Common stock a/c ($125,000 * $40) $5,000,000

Share Premium a/c $50,000

(c) Dec 31,2020 Bonds payable                          $5,000,000

Loss on bonds $50,000

Cash                                                 $5,050,000

*Retired 7% bonds at 101.