Question

On January 1, 2021, Gless Textiles issued $12 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99 (that is, 99% of face amount). Century Services purchased 10% of the issue as an investment. Required: 1. Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond investment by Century. 2. Prepare the journal entries for the June 30, 2025, interest payment by both Gless and Century assuming both use the straight-line method. 3. On July 1, 2026, when Gless’s common stock had a market price of $33 per share, Century converted the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method).

Answer 1

Ans:

1. Journal Entries

S.no	Account title and explanation	Debit($)	Credit($)
	Cash{12 million*101% face value)	12,120,000
	Premium on Bonds Payable{12 million *1%)		120,000
	Bonds payable		12,000,000
	( to record the issuance of bonds)
	Investment in convertible bonds{10%* face value}	1,200,000
	Premium on bonds Investment	12,000
	Cash(101%*1,200,000)		1,212,000
	(to record the purchase of bonds)

2. Journal Entries

Date	Account title and explanation	Debit($)	Credit($)
June 30,2025	Interest Expense{12,000,000*9%*6/12)	534,000
	Premium on Bonds Payable{120,000/20}	6,000
	Cash		540,000
	( to record the payment of interest))
June 30,2022	cash{12,000,000*9%*6/12)	54,000
	Premium on Bonds Payable{12,000/20}		600
	Interest revenue		53,400
	(to record the Interest Revenue)

3. Journal Entries

Date	Account title and explanation	Debit($)	Credit($)
	Convertible Bonds payable{12,000,000*10%}	1,200,000
	Premium on Bonds Payable{120,000/20}	5,400
	Common Stock		1,205,400
	( to record the Conversion of Bonds)
	Investment in Common Stock	1,205,400
	Investment in Convertible Bonds{1,205,400-5,400}		1,200,000
	Premium on Bonds Payable{12,000-600*11}**		5,400
	(to record the Conversion of Bonds)

As There was 11 Interest payments since issuance of Bonds as from 1 Jan 2021 to 1July 2026 there will be 11 periods on which interest is liable to pay