Question

On January 1, 2020, Oriole Corporation issued a series of 100 convertible bonds, maturing in 5 years. The face amount of each bond was $500. Oriole received $51,300 for the bond issue. The bonds paid interest every December 31 at 8%; the market interest rate for bonds with a comparable level of risk was 7.80%. The bonds were convertible to common shares at a rate of 10 common shares per bond. Oriole amortized bond premiums and discounts using the effective interest method, and the company’s year-end was December 31.

On January 1, 2021, 20 of the bonds were converted into common shares. On June 30, 2021, another 20 bonds were converted into common shares. The bondholders chose to forfeit the accrued interest on these bonds.

On January 1, 2022, when the fair value of the bonds was $30,690 due to a decrease in market interest rates, a conversion inducement of $26/bond was offered to the remaining bondholders to convert their bonds to common shares. All of the remaining 60 bonds were converted into common shares at this time.

Prepare all required journal entries to record the above transactions (Hint: don’t forget to accrue interest and amortize the premium on the bond at year-end). (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Answer:

Date	Account Title and Explanation	Debit $	Credit $
Jan. 1, 2020	Cash	51,300
	Bonds payable (50,000*0.68692)+(50,000*8%*4.01385)		50,401
	Contributed surplus – conversion rights		899
	(To record issuance of bonds)
Dec. 31, 2020	Interest expense (50,401*7.8%)	3,931
	Bonds payable	69
	Cash (50,000*8%)		4,000
	(To record interest expense)
Jan. 1, 2021	Bonds payable (50,401-69)*20/100	10,066
	Contributed surplus – conversion rights (899*20/100)	180
	Common shares		10,246
	(To record conversion of bonds)
Jun. 30, 2021	Bonds payable (50,401-69)*20/100	10,066
	Contributed surplus – conversion rights (899*20/100)	180
	Interest expense ((50,401-69)*7.8%*6/12*20/80)	491
	Common shares		10,737
	(To record conversion of bonds and interest forfeited)
Dec. 31, 2021	Interest expense (50,401-69-10,066-10,066)*7.8%	2,356
	Bonds payable	44
	Cash (50,000-10,000-10,000)*8%		2,400
	(To record interest expensed)
Jan. 1, 2022	Bonds payable (50,401-69-10,066-10,066-44)	30,156
	Loss on redemption (30,690 -30,156)	534
	Contributed surplus – conversion rights (899-180-180)	539
	Retained earnings (1,560-534)	1,026
	Common shares (30,156+539)		30,695
	Cash (100-20-20)*26		1,560
	(To recordconversion on remaining bonds into shares)

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