Convertible Bonds. Garr Co. issued $6,000,000 of 12%, 5-year convertible bonds on December 1, 2020 for...

Convertible Bonds. Garr Co. issued $6,000,000 of 12%, 5-year convertible bonds on December 1, 2020 for $6,025,480 plus accrued interest. The bonds were dated April 1, 2020 with interest payable April 1 and October 1. Bond premium is amortized each interest period on a straight-line basis. Garr Co. has a fiscal year end of September 30.

On October 1, 2021, $3,000,000 of these bonds were converted into 42,000 shares of $15 par common stock. Accrued interest was paid in cash at the time of conversion.

Instructions

(a) Prepare the entry to record the issue of the bond.

(b) Prepare the entry to record the interest expense at April 1, 2021. Assume that interest payable was credited when the bonds were issued.

(c) Prepare the entry to record the conversion on October 1, 2021. Assume that the entry to record amortization of the bond premium and interest payment has been made.

Solutions

Expert Solution

a. Journal entry

Account	Debit	Credit
Cash (6025480 + 120000)	6145480
Bonds payable		6000000
Premium on bonds payable		25480*
Interest payable (360000 * 2/6)		120000

* 6025480 - 6000000

b. Journal entry

Account	Debit	Credit
Interest payable (360000 * 2/6)	120000
Interest expense (balancing)	238040
Premium on bonds payable*	1960
Cash (6000000 * 12% * 6/12)		360000

* Premium amortized

Total premium = 6025480 - 6000000 = 25480

Months remaining = 52

Premium per month = 25480 / 52 = 490

Premium amortized = 490 * 4 = 1960

c. Journal entry

Account	Debit	Credit
Bonds payable	3000000
Premium on bonds payable*	10290
Common stock (42000 * 15)		630000
Paid in capital in excess of par		2380290

* Premium on bonds payable

Discount on bond premium = (25480 / 6000000) * 3000000 = 12740

Premium payable = (12740 / 52) * 10 = 2450

Unamortized bond premium = 12740 - 2450 = 10290

ekkarill92 answered 1 year ago

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