Question

on september 30,2017, Gargiola inc. Issued 4millions of 10 year, 8% convertible bonds for 4.6millions. The bonds pay interest on march 31 and September 30 and mature on September 30, 2027. Each 1000$ bond can be converted into 80 no par value common shares. In addition, each bond include 20 detachable warrants. Each warrant can be used to purchase one common share at an exercise price of 15$. Immediately after the bond issuance, the warrants traded at 3$ each. Without the warrants and the conversion rights, the bonds would have been expected to sell for 4.2 million. On march 23, 2020, half of the warrants were exercised. The common shares of Gargiola inc. were trading at 20$ each on this day.

Required:

D) prepare the December 31,2017 year end adjusting journal entries and the payment of interest on march 31 2018. Don’t use the reversing entries. For amortization premium, pro-rate using numbers a month

Answer 1

Your answer:

Dec 31 2017	Interest Expense	76,516
	Bonds Payable	3,484
	Interest Payable		80000
March 31 2018	Interest Expense	76515
	Interest Payable	80000
	Bonds Payable	3485
	Cash		160000

Explanation:

$153,031 X 3/6 = $76,516)

PV	$4,200,000
I	Excel formula =RATE(nper,pmt,pv,fv,type)	Yields 3.6436 %
N	20
PMT	($160,000)
FV	($4,000,000)
Type	0
Schedule of Bond Premium Amortization
Effective Interest Method
8% Semi-annual Bonds Sold to Yield 7.2872%
	4%	4%
	Cash	Effective	Premium	Carrying
Date	Paid	Interest	Amort.	Amount
Sept. 30,				$4,200,000
Mar. 31,	$160,000	$153,031	$6,969	4,193,031
Sept. 30,	160,000	152,777	7,223	4,185,808
Mar. 31,	160,000	152,514	7,486	4,178,322
Sept. 30,	160,000	152,241	7,759	4,170,563
Mar. 31,	160,000	151,959	8,041	4,162,522
Sept. 30,	160,000	151,666	8,334	4,154,188
Mar. 31,	160,000	151,362	8,638	4,145,550
Sept. 30,	160,000	151,047	8,953	4,136,597
Mar. 31,	160,000	150,721	9,279	4,127,318
Sept. 30,	160,000	150,383	9,617	4,117,701