Question

EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. 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.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Round to the nearest dollar.)

(a) August 1, 2018. (Assume the book value method is used.)

(b) August 31, 2018.

(c) December 31, 2018, including closing entries for end-of-year.

 

Answer 1

Step 1: Definition of discount on bonds payable

When the bonds are issued for less than their face value then the bonds are known as issues at discount.

 

Step 2: Being the entry for the conversion

Date Particulars Debit Credit

August 1, 2018 Bonds Payable $250,000

Discount on Bonds Payable $4,815

Common Stock $200,000

Paid in Capital $45,185

(Being entry for conversion)

August 1, 2018 Interest Payable $2,500

Cash $2,500

(Being entry for the interest payable)

 

Step 3: Entry for interest payable

Date Particulars Debit Credit

August 31, 2018 Interest Expense $405

Discount on bonds payable $405

(Being entry for the interest Expense)

August 31, 2018 Interest Expense $22,500

Interest Payable $22,500

(Being adjustment entry for interest expense)

 

Step 4: Closing entry

Date Particulars Debit Credit

December 31, 2018 Income Summary $292,675

Interest Expense $292,675

(Being closing entry at the end of the year))

 

The amount transferred to income summary account at the end of the year is $292,675.