Question

Issuance of Convertible Bonds

Joy Insurance decides to finance expansion of its physical facilities by issuing convertible debenture bonds. The terms of the bonds follow: maturity date 10 years after May 1, 20Y1, the date of issuance; conversion at option of holder after two years; 20 shares of $1 par value stock for each $1,000 bond held; interest rate of 12% and call provision on the bonds of 102. The bonds were sold at 101.

1. Give the entry on Joy's books to record the sale of $900,000 of bonds on July 1, 20Y1; interest payment dates are May 1 and November 1. Assume the sale of the bonds is to be recorded in a manner that will recognize a value related to the conversion feature. The estimated sales price of the bonds without the conversion feature is 98.

July 1 Cash $$ Discounts on Bonds Payable   $$ Bonds Payable   $$ Paid-in Capital Arising from Bond Conversion Feature $$ Interest Payable   $$

Answer 1

Face Value of one Bond = 100

Total Number of Bond issued = 900,000/100 = 9,000

.Number of Shares = 900,000/1000*20 = 18,000 shares.

Bond Interest for two months = 900,000*12%/12*2 = 18,000

Bond Issue Price = 101 + 18,000/9000 = 103

Total Issue Price = 900,000*103 = 927,000

Please refer below journal entry

Cash Debit	$927,000
Discount on Bonds Payable Debit (100-98)*9000	$18,000
Bond Payable Credit		$900,000
Interest Payable (900,000*12%/12*2) credit		$18,000
Paid-in Capital Arising from Bond Conversion Feature Credit		$27,000