Question

Shamrock Inc. issued $4,260,000 of 10%, 10-year convertible bonds on June 1, 2020, at 98 plus accrued interest. The bonds were dated April 1, 2020, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2021, $1,597,500 of these bonds were converted into 33,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a)		Prepare the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued.
(b)		Prepare the entry to record the conversion on April 1, 2021. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,125.)

No.	Account Titles and Explanation	Debit	Credit
(a)	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
(b)	enter an account title	enter a debit amount	enter a credit amount
	enter an account title

Answer 1

Answer:

a.

No	Account Titles and Explanation	Debit	Credit
(a)	Interest Payable	71,000
	Interest Expense	144,888
	Discount on Bonds Payable		2,888
	Cash		213,000
	To record the interest expense at October 1, 2020

b.

No	Account Titles and Explanation	Debit	Credit
(b)	Bonds Payable	1,597,500
	Discount on Bonds Payable		29,242
	Common Stock		660,000
	Paid-in Capital in Excess of Par		908,258
	To record the conversion on April 1, 2021

Calculation:

a.

Here we need to prepare the entry to record the interest expense at October 1, 2020 assuming that accrued interest payable was credited when the bonds were issued.

For that first we need to find the cash paid.

Cash = 4,260,000 x 10% / 2 = 213,000

Then we need to find the issuance price inorder to calculate the Discount amortized.

Issuance price = 4,260,000 / 100 x 98 = 4,174,800

So the total discount is:

Par value	4,260,000
Less: Issuance price	4,174,800
Total discount	85,200

The Months remaining = 118 months

So Discount per month = 85,200/118 = 722

Then we need to find the Discount amortized for 4 months

Discount on Bonds Payable = 722 x 4 months = 2,888

Then we need to calculate the Interest Payable.

Interest Payable = 213,000 x 2/6 = 71,000

Then we need to debit the Interest Expense.

That is 213,000 x 4/6 = 142,000. And to that we need to add the Discount amortized of 2,888.

So the Interest Expense = 142,000 + 2,888 = 144,888

b.

Here we need to prepare the entry to record the conversion on April 1, 2021 assuming that the entry to record amortization of the bond discount and interest payment has been made.

The bonds payable is provided in the question which is 1,597,500 need to be debited.

It is converted to Common Stock, so we need to credit Common Stock.

Common Stock = 33,000 x 20 = 660,000

Then we need to calculate the Unamortized bond discount. For that we need to find the Discount related to 3/8 of the bonds.

Discount related to 3/8 of the bonds = 85,200 x 3/8 = 31,950

Then we need to deduct the  Discount amortized.

Discount amortized = 31,950 x 118 months / 10 years = 2,708

Then,

Discount related to 3/8 ofthe bonds	31,950
Less: Discount amortized	2,708
Unamortized bond discount	29,242

Paid-in Capital in Excess of Par = 1,597,500 - 29,242 - 660,000 = 908,258