Question

Edo Company had $1 million of $1,000 bonds outstanding (carrying value: $950,000). Each bond is convertible into five shares of $0.10 par value common stock. Prepare the journal entry necessary to record the redemption of the convertible bonds. Then prepare the alternative journal entry for the same facts as before, but Edo had encouraged the bondholders to convert the debt by paying them $20 in addition to the five shares for converting.

Answer 1

Particulars	Value	Par Value	Unamortised discount	Carrying Value		Numbers
Bond	$        10,00,000	$       1,000.00	$         50,000	$ 9,50,000		1,000
To be converted to common stock @ 5 common stock for 1 bond
Option 1	Value	Par Value	Numbers
Common Stock	$              500.00	$               0.10	5,000	5 Share per bond
Additional Paid in Capital (APIC)	$          9,99,500			Balance Amount
	$        10,00,000
Journal Entry (Option 1)
Bonds Outstanding A/C	Dr	$    10,00,000
To Common Stock A/C	Cr		$               500
To APIC A/C	Cr		$     9,99,500
Unamortised Discount on Bonds A/C	Dr	$          50,000		Balance Sheet item
To Amortisation of Discount A/C	Cr		$         50,000	Profit & Loss item
Option 2	Value	Par Value	Numbers
Common Stock	$                    500	$               0.10	5,000	5 Share per bond
Cash	$              20,000	$             20.00	1,000	Cash payment @20 per bond
Additional Paid in Capital (APIC)	$          9,79,500			Balance Amount
	$        10,00,000
Journal Entry (Option 2)
Bonds Outstanding A/C	Dr	$    10,00,000
To Cash A/C	Cr		$         20,000
To Common Stock A/C	Cr		$               500
To APIC A/C	Cr		$     9,79,500
Unamortised Discount on Bonds A/C	Dr	$          50,000		Balance Sheet item
To Amortisation of Discount A/C	Cr		$         50,000	Profit & Loss item