Question

On January 1, 2016, Gless Textiles issued $21 million of 10%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99 (that is, 99% of face amount). Century Services purchased 15% of the issue as an investment.

Required:
1.	Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond investment by Century. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

       

2.	Prepare the journal entries for the June 30, 2020, interest payment by both Gless and Century assuming both use the straight-line method. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

       

3.	On July 1, 2021, when Gless’s common stock had a market price of $33 per share, Century converted the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method). (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

       

Answer 1

Solution:

1.

Date	General Journal	Debit	Credit
Jan.01,2016	Cash	$21,210,000
	Convertible bonds payable		$21,000,000
	Premium on bonds payable		210,000
Jan.01,2016	Investment in convertible bonds	$3,150,000
	Premium on bond investment	31,500
	Cash		$3,181,500

2.

Date	General Journal	Debit	Credit
June30,2020	Interest Expense	$1,039,500
	Premium on bonds payable ($210,000/10)*1/2	10,500
	Cash		$1,050,000
June30,2020	Cash	$157,500
	Premium on bonds investment		$ 1575
	Interest revenue		155,925

3.

Date	General journal	Debit	Credit
July1,2021	Convertible bonds payable	$3,150,000
	Premium on bonds payable [{$210,000 - (10,500*11)}15%	$14,175
	Common stock ( to balance)		$3,164,175
July1,2021	Investment in common stock	$3,164,175
	Investment in convertible bonds		$3,150,000
	Premium on bond investment [$31,500 - (11*$1,575) ]		$14,175