Question

On January 1, 2023, Comet Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.8 million. The effective interest rate on the bond is 6.1352734%. Comet recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 20 shares of Comet's no par ordinary shares.

On June 1, 2025, Comet notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2025. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Comet paid the semiannual interest and issued the requisite number of shares for the bonds being converted.

Required:

1. Prepare the journal entry for the issuance of the bonds by Comet.

2. Prepare the journal entry for the June 30, 2023, interest payment.

3. Prepare the journal entries for the June 30, 2025, interest payment by Comet and the conversion of the bonds (book value method).

Answer 1

1)
Date	Accounts Titles and Explanations	Debit (in $)	Credit (in $)
Jan 1, 2023	Cash	$ 40,800,000
	Convertible Bonds Payable		$ 40,000,000
	Premium on Bonds Payable   - Bal. Fig.		$ 800,000
	(To record issue of Bonds)
2)
Date	Accounts Titles and Explanations	Debit (in $)	Credit (in $)
June 30, 2023	Interest Expense - Bal. Fig.	$ 1,160,000
	Premium on Bonds Payable      ($ 800,000 / 10 x 2)	$ 40,000
	Cash               ( $ 40,000,000 x 6% x 1/2 )		$ 1,200,000
	(To record the interest payment)
3)
Date	Accounts Titles and Explanations	Debit (in $)	Credit (in $)
June 30, 2025	Interest Expense	$ 1,160,000
	Premium on Bonds Payable (800,000/20)	$ 40,000
	Cash               ( $ 40,000,000 x 6% x 1/2 )		$ 1,200,000
	(To record interest payment)
June 30, 2025	Convertible Bonds Payable	$ 40,000,000
	Premium on Bonds Payable ( $ 800,000 x 15 / 20)	$600,000
	Common Stock - Bal. Fig.		$ 40,600,000
	(To record conversion of bonds)