In: Accounting
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 $33 per share, Century converted the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method).
Ans:
1. Journal Entries
S.no | Account title and explanation | Debit($) | 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