Question

Stellar Inc. issued $4,130,000 of 11%, 10-year convertible bonds on June 1, 2020, at 98 plus accrued interest. The bonds were dated April 1, 2020, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2021, $1,548,750 of these bonds were converted into 24,000 shares of $21 par value common stock. Accrued interest was paid in cash at the time of conversion. (a) Prepare the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued. (b) Prepare the entry to record the conversion on April 1, 2021. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

No. Account Titles and Explanation Debit Credit (a) Interest Payable Interest Expense Cash Discount on Bonds Payable 2800 (b) Bonds Payable 1548750 Discount on Bonds Payable Common Stock 504000 Paid-in Capital in Excess of Par - Common Stock

Answer 1

Answer:

a)

Particulars	Debit($)	Credit ($)
Interest payable (227150*2/6)	75717
Interest expense ((227150*4/6)+2800)	154233
Discount on bonds payable		2800
Cash (4130000*11%/2)		227150

Total discount = 3840000-(4130000*0.98)
=4130000-4047400
=82600
Discount aamortized = (82600/118)*4 (remainning months 10*12-2 = 118)
=700*4
=2800
Here, Semiannual interest = 4130000*11%*1/2
=227150

b)

Particulars	Debit ($)	Credit ($)
Bonds payable	1548750
Discount on bonds payable		28350
Common stock (24000*21)		504000
Paid in capital in excess of par		1016400

Unamortized bond discount
=(82600*3/8)-((82600*3/8)/118)*10)
=30975-((30975/118)*10)
=30975-2625
=28350