Question

On May 1, 2016, DigiCom issued $3,600,000 of 10 year, 11%, convertible bonds at 94 plus accrued interest. The bonds paid interest on May 1 and November 1. DigiCom follows ASPE and amortizes its bond discount using the straight-line method. On the same date, non-convertible bonds would have sold at 93 plus accrued interest. On May 1, 2017, $720,000 of the bonds were converted into 29,000 shares.

a) DigiCom measures the equity component using the residual method. Record the following journal entries dealing with the bonds:
 May 1, 2016: Issuance of the convertible bonds.
 November 1, 2016: First interest payment.
 December 31, 2016: DigiCom's year end.
 May 1, 2017: Second interest payment.
 May 1, 2017: Conversion of the bonds.

Answer 1

Journal Entries

DATE	ACCOUNT NAME	Debit	Credit
May 1 2016	Issue of convertible bonds @11%
	Cash\Bank	$3384000
	Discount on Issue of Bonds	$216000
	Bonds Payable		$3600000
	(Bonds sold for $3384000 plus $0 accured interest)
Nov 1 2016	Interest payment
	Interest expenses	$198000
	Cash\Bank		$198000
	(Interest on $3600000 for 6months)
Dec 31 2016	Interest expenses	$66000
	Interest expenses payable		$66000
	(interest expenses due for Nov and Dec)
	Profit and loss account	$36000
	Interest expenses		$264000
	Discount on issue of bonds		$14400
	(Amortization of discount for 8 months)
May 1 2017	Interest Payment
	Interest expenses	$132000
	Interest expenses payable	$66000
	Cash/Bank		$198000
	( interest for 6months)
May 1 2017	Conversion of Bonds
	Bonds Payable	$720000
	shares (29000)		$720000