Question

Exercise 16-6

On January 1, 2017, Stellar Corporation issued $4,060,000 of 10-year, 9% convertible debentures at 104. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into 8 shares of Stellar Corporation $101 par value common stock after December 31, 2018.

On January 1, 2019, $406,000 of debentures are converted into common stock, which is then selling at $111. An additional $406,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $117. Accrued interest at March 31 will be paid on the next interest date.

Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a)		December 31, 2018.		(c)		March 31, 2019.
(b)		January 1, 2019.		(d)		June 30, 2019.

Record the conversions using the book value method.

Answer 1

Date	Account Titles	Debit	Credit
Dec 31,2018	Interest Expenses	174580
	Premium on Bonds	8120
	Cash		182700

Workings:

Interest on bonds = 4,060,000 *9% *6/12 = 182700

Premium on Bonds for current period = [4,060,000 * (104%-100%) ] / (10*2) = 8120

Interest Expense for the current period = 182700- 8120 = 174580

b)

Date	Account Titles	Debit	Credit
Jan 1 ,2019	Bonds Payable	406000
	Premium on Bonds	12992
	Common Stock		328048
	Paid in Capital in Excess of Par (Bal. Fig.)		90944

Workings:

1. No of Bonds converted = 406,000/1000 = 406 Bonds
    No of shares the bonds are converted to = 406 * 8 shares = 3248 shares

    Par value of shares converted = 3248*101 = 328048

2. Premium on bonds converted = 406,000 *4% = 16240

Premium amortized till date = 16240 * (4/20) = 3248

Balance premium to be amortized = 16240- 3248 = 12992

c)

Interest Expense:

Date	Account Titles	Debit	Credit
Mar 31 ,2019	Interest Expense [Bal. Fig.]	8729
	Premium on Bonds	406
	Interest Payable		9135

Workings:

Interest Payable = 406000 *9%* 3/12 = 9135

Premium on Bonds = 406,000 *4% = 16240

For 3 months, premium on bonds = [16240 * 3/6] / 20 = 406

Conversion to Shares entry:

Date	Account Titles	Debit	Credit
Mar 31 ,2019	Bonds Payable	406000
	Premium on Bonds	12586
	Common Stock		328048
	Paid in Capital in Excess of Par [Bal. fig.]		90538

Workings:

1. No of Bonds converted = 406,000/1000 = 406 Bonds
    No of shares the bonds are converted to = 406 * 8 shares = 3248 shares

    Par value of shares converted = 3248*101 = 328048

2. Premium on bonds converted = 406,000 *4% = 16240

Premium amortized till 4 half years upto Jan 1,2019 = 16240 * (4/20) = 3248

Premium amoritized for 3 months upto Mar 31,2019 = 406

Total Premium amortized = 3248+406 = 3654

Balance premium to be amortized = 16240- 3654 = 12586

d)

Date	Account Titles	Debit	Credit
June 30 ,2019	Interest Expense(Bal.fig.)	139664
	Premium on Bonds	6496
	Interest Payable	9135
	Cash		155295

Workings:

1. Balance of bonds after conversion = 4,060,000 - 406,000 - 406,000 = 3,248,000

2. Premium on balance bonds for current year = (3,248,000 * 4%) /20 = 6496

3. Interest on bonds paid = (3,248,000 *9% *6/12) = 146160

Interest on paid till 31 Mar 2019 as per (c) journal entry = 9135

Total interest paid= 146160+9135 = 155295