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 1 year ago

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

Convertible Bonds. 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...

Garr Co. issued $4220000 of 12%, 5 year convertible bonds on December 1, 2017 for $4237830...

Garr Co. issued $4220000 of 12%, 5 year convertible bonds on December 1, 2017 for $4237830 plus accrued interest. The bonds were dated April 1, 2017 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 wnd of September 30. On October 1, 2018, $2110000 of these bonds were converted into 29000 shares of $15 par common stock. Accrued interest was paid in cash...

On April 1, 2019 Garr Co. issued $4,800,000 of 5%, 5-year convertible bonds at a price...

On April 1, 2019 Garr Co. issued $4,800,000 of 5%, 5-year convertible bonds at a price of 102. The bonds pay interest on April 1 and October 1. Bond premium is amortized each interest payment period on a straight-line basis. On April 1, 2020, all of these bonds were converted into 20,000 shares of $5 par common stock. a) Prepare the entry to record the original issuance of the convertible bonds. b) Prepare the entries to record the interest payment...

On December 1, 2020, Progressive Corp. issued $5,000,000 (par value), 12%, 5-year convertible bonds for $5,026,000...

On December 1, 2020, Progressive Corp. issued $5,000,000 (par value), 12%, 5-year convertible bonds for $5,026,000 plus accrued interest. The bonds were dated April 1, 2020 with interest payable April 1 and October 1. If the bonds had NOT been convertible, they would have sold for $5,006,000. The bond premium/discount is amortized each interest period on a straight-line basis. Progressive does NOT value the equity component at zero. Progressive’s fiscal year end is September 30. On October 1, 2021, half...

Cardinals Co issued $6,000,000 of 8%, 15-year bonds on 5/1/18 plus accrued interest at a time...

Cardinals Co issued $6,000,000 of 8%, 15-year bonds on 5/1/18 plus accrued interest at a time when the market rate of interest was 5%. The bonds have an authorized date of 3/1/18 and pay interest each 3/1 and 9/1. The effective-interest method is used to amortize any discount or premium. ** REQUIRED: 1) Determine the following items: a) issue price of the bonds. 7869408 b) amount of discount or premium (indicate which) for which the bonds were issued. 1869408 c)...

On January 1, 2020, Oriole Ltd. issued 1,040 5-year, 11% convertible bonds at par of $1,000,...

On January 1, 2020, Oriole Ltd. issued 1,040 5-year, 11% convertible bonds at par of $1,000, with interest payable each December 31. Each bond is convertible into 100 common shares, and the current fair value of each common share is $6. Similar straight bonds carry an interest rate of 13%. (a) Calculate the PV of the debt component by itself. Calculate using any of the following methods: (1) factor tables, (2) a financial calculator, or (3) Excel function PV ....

On January 1, 2020, Blossom Ltd. issued 820 5-year, 11% convertible bonds at par of $1,000,...

On January 1, 2020, Blossom Ltd. issued 820 5-year, 11% convertible bonds at par of $1,000, with interest payable each December 31. Each bond is convertible into 100 common shares, and the current fair value of each common share is $6. Similar straight bonds carry an interest rate of 13%. Calculate the PV of the debt component by itself. Calculate using any of the following methods: (1) factor tables, (2) a financial calculator, or (3) Excel function PV. QUESTION: 1)...

Metlock Inc. issued $3,180,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for...

Metlock Inc. issued $3,180,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for 13% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Metlock Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2021, $318,000 of bonds were turned in for conversion into...

Volker Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for...

Volker Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.'s $100 par value common stock for each $1,000 of bonds. On August 1, 2021, $250,000 of bonds were turned in for conversion into...

On January 1, 2020, Oriole Corporation issued a series of 100 convertible bonds, maturing in 5...

On January 1, 2020, Oriole Corporation issued a series of 100 convertible bonds, maturing in 5 years. The face amount of each bond was $500. Oriole received $51,300 for the bond issue. The bonds paid interest every December 31 at 8%; the market interest rate for bonds with a comparable level of risk was 7.80%. The bonds were convertible to common shares at a rate of 10 common shares per bond. Oriole amortized bond premiums and discounts using the effective...

Question