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home / study / business / accounting / accounting questions and answers / the cfo of the tapco plastics industries corporation has requested your help in preparing several ... Question: The CFO of The Tapco Plastics Industries Corporation has requested your help in preparing several... (3 bookmarks) The CFO of The Tapco Plastics Industries Corporation has requested your help in preparing several journal entries. She has sent you the following information. October 1, 2013: issued $6,000,000 of “20” year convertible bonds. The bonds pay an annual rate of interest of 5%, payable semi-annually on April 1 st and October 1 st each year. The bonds were issued with a premium of $180,000. The premium is being amortized on a straight line basis. The bonds can be converted on any date after 4 years from their issue date, into 10 shares of Tapco’s $5 par value common stock for each $1,000 of bonds. On December 1, 2017 $1,200,000 of bonds were turned in for conversion. Accrued interest on the bonds being converted was also paid to the holders at the time of the conversion. The company’s stock was selling for $205 per share on the date of the conversion. On May1, 2018 $480,000 of bonds were turned in for conversion. Accrued interest on the bonds being converted was also paid to the holders at the time of the conversion. The company’s stock was selling for $235 per share on the date of the conversion. Note: Tapco Plastics Corporation has a year end of December 31 st . Prepare all journal entries pertaining to these bonds for the dates below: October 1, 2017 December 1, 2017 May 1, 2018 December 31, 2018 April 1, 2019

Answer 1

Journal Entries:-

• October 1, 2017:

Interest on bond A/c Dr. $150,000*

To cash A/c. $150,000

( Being payment of interest accured on bond)

(*6,000,000×5%×6/12 =$150,000)

• December 1,2017:

1.) Interest on bond A/c Dr. $10,000**

To cash A/c $10,000

( Being interest paid on bonds converted)

(** 1,200,000×5%×2/12= $10,000)

2.) 5% Bond A/c. Dr. $1,200,000

Discount on conversion A/c Dr. $1,260,000 (Bal. Fig.)

To Share Capital A/c $60,000

To Securities Premium A/c $24,00,000

( Being conversation of $1,200,000 bonds into 12,000

Shares of $5 each, where market price is $205 per share)

Notes:-

Share Capital= 1,200,000/1000×10×5 = $60000

Securities Premium = 205× 12000 - 60,000= $2,400,000

• May 1,2018:

1.) Interest on bond A/c. Dr. $2000*

To. Cash A/c . $ 2000

( Being interest paid on bond converted)

*( 480,000×5%×1/12=$2,000)

2.) 5% Bond A/c Dr. $ 480,000

Discount on conversion A/c Dr. $ 648,000. (Bal.Fig.)

To. Share Capital A/c. $ 24,000

To. Securities Premium A/c $ 1,104,000

( Being $480,000 bonds converted into 4800 shares of $5 each , where market price per share is $ 235)

Notes:-

Share capital = 480,000/1000×10×5 = $24,000

Securities Premium = 4,800×235 - 24000 = $1,104,000

• December 31,2018:

1.) Interest on bond A/c Dr. $54,000*

To Interest Outstanding A/c $54,000

( Being interest Outstanding on bond at end of the year )

*(6,000,000-1,200,000-480,000)×5%×3/12= 54,000

2.) P&l A/c Dr. $ 224,000*

To Interest on bond A/c $224,000

( Being interest charged to P&l A/c)

*( 4,320,000×5%×12/12) + (480,000×5%×4/12) =$224,000

• April 1, 2019:

Interest on bond A/c Dr. $ 54,000

Interest Outstanding A/c. Dr. $ 54,000

To cash A/c $ 108,000*

( Being interest paid on bonds)

*(4,320,000×5%×3/12) + 54,000 = $ 108,000