Question

Blue Inc. issued $3,840,000 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, $1,440,000 of these bonds were converted into 24,000 shares of $21 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.

Answer 1

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a	Journal entry for interest expenses on October 1 will be
	Interest Payable	$     57,600.00		a
	Interest Expenses	$   1,17,803.00		d +l
	To Discount on Issue of Bonds		2,603.00	l
	To Cash/ Bank		$ 1,72,800.00
Working Note 1
Calculation Of Interest expense on October 1
As the bond is issued at a discount , the amortization of the discount has to be recorded along with the interest expenses.
Interest Expense	Amount	Notes
a	The amount of Bond	$ 38,40,000.00
b	Interest payable on october 1 at 9% for 6 months	$   1,72,800.00
c	2 months interest credited at the time of bond issue(Interest payable)	$     57,600.00
d	Interest for 4 months	$   1,15,200.00
Discount
e	Bond Issue amount at face value	$ 38,40,000.00
f	Amount Received for bond issue is 98%	$ 37,63,200.00
g	So Discount on issue of bond at 2%	$     76,800.00
h	The bond was issued on june 1 but the same was dated April,so the amortisation period of the bond will not be 10 years but 9 years and 10 months.
i	Bond Period	10 year
j	Months Remaining ( 10year x 12 months ) - 2 months	118
k	Discount per month	$         650.85	g/j
l	Discount to be recogonised in October 1 for 4 months	$       2,603.00	(k x 4 )rounded
b	Journal entry to record the conversion on April 1, 2021.
	9% Bond	1440000		W.N 2 (a)
	To Common Stock {24000 shares x $21}		504000
	To Discount On Bonds Payable		26,360.00	W.N 2 (f)
	To Paid in captiral in excess of the Par		9,09,640.00	Bal.Figure
Working Note 2
Conversion of Bond to Common Stock
The amount of unamortised porion of discount on issue of bonds has to be recogonised to the extend of the value of converted Bonds.
a	Amount of Bonds Converted	$ 14,40,000.00
b	Discount corressponding to the converted bonds ( 1440000 x 2%)	$     28,800.00	(as bond issued at 98)
c	Months Remaining ( 10year x 12 months ) - 2 months	118
d	Discount per month	$         244.07
e	Amortised till 1st April 2021(specifically mentioned in the question that the entry for amortization of discount and interest expenses were made before the conversion of the bonds)	$       2,440.00	(rounded)
f	Unamortised amount of discount on the date of conversion	$     26,360.00	(b-e)
g	Accured Interest on 1st April 2021 relating to the converted bond
h	(1440000 x 9% x 6/12)	$     64,800.00
Assumed that the entry to record amortization of the bond discount and interest payment has been made so no entry is required for the same.