1. Garr Co. issued $6,000,000 of 12%, 5-year convertible bonds on December 1, 2020 for $6,025,480...

1. 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.

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

Expert Solution

Solution:-

a. Prepare the entry to record the interest expense at April 1, 2021. Assume that interest payable was credited when the bonds were issued:-

Account Titles and Explanation	Debit	Credit
Interest Payable	120,000
Interest Expense	238,040
Premium on Bonds Payable	1,960
Cash		360,000

Explanation:-

Issuance price	6,025,480
Par value	6,000,000
Total premium	25,480
Months remaining	52
Premium per month	490
Premium amortized (4 × $490)	1,960

b. 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:-

Account Titles and Explanation	Debit	Credit
Bonds Payable	3,000,000
Premium on Bonds Payable	10,290
Common Stock (42,000 × $15)		630,000
Paid-in Capital in Excess of Par		2,380,290

Explanation:-

Premium related to 1/2 of the bonds ($25,480 ÷ 2)	12,740
Less premium amortized [($25,480 ÷ 52) × 10] × 1/2	2,450
Premium remaining	10,290

Please Rate or comment if you have any doubt regarding this solution.

ekkarill92 answered 2 years ago

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