Question

On January 1, 2020, Kingbird Corporation issued a series of 500 convertible bonds, maturing in five years. The face amount of each bond was $1,000. Kingbird received $535,000 for the bond issue. The bonds paid interest every December 31 at 5%; the market interest rate for bonds with a comparable level of risk was 4%. The bonds were convertible to common shares at a rate of ten common shares per bond. Kingbird amortized bond premiums and discounts using the effective interest method, and the company’s year-end was December 31.

On January 1, 2021, 100 of the bonds were converted into common shares. On June 30, 2021, another 100 bonds were converted into common shares. The bondholders chose to forfeit the accrued interest on these bonds.

On January 1, 2022, when the fair value of the bonds was $311,500 due to a decrease in market interest rates, a conversion inducement of $18/bond was offered to the remaining bondholders to convert their bonds to common shares. All of the remaining 300 bonds were converted into common shares at this time.

QUESTION:

1) Prepare all required journal entries to record the above transactions. (Hint: don’t forget to accrue interest and amortize the premium on the bond at year-end, if needed).

	Account Titles and Explanation	Debit	Credit
Jan. 1, 2020
Dec. 31, 2020
Jan. 1, 2021
Jun. 30, 2021
Dec. 31, 2021
Jan. 1, 2022

Answer 1

Date	Accounts title and explanation	Debit($)	Credit ($)
Jan. 1, 2020	Cash	535000
	To Bonds payable ( Note 1)		522255
	To Contributed surplus – conversion rights (balancing figure)		12745
Dec. 31, 2020	Interest expense ( Note 2)	20890
	Bonds payable  (balancing figure)	4110
	To Cash ( Note 3)		25000
Jan. 1, 2021	Bonds payable ( Note 4)	103629
	Contributed surplus – conversion rights  ( Note 5)	2549
	To Common shares		106178
Jun. 30, 2021	Bonds payable  ( Note 6)	103629
	Contributed surplus – conversion rights  ( Note 7)	2549
	Interest expense ( Note 8)	2591
	To Common shares		108769
Dec. 31, 2021	Interest expense  ( Note 9)	12435
	Bonds payable	2565
	To Cash  ( Note 10)		15000
Jan. 1, 2022	Bonds payable  ( Note 11)	308322
	Loss on redemption	3178
	Contributed surplus – conversion rights	7647
	Retained earnings	2222
	To Common shares		315969
	To Cash		5400

Explanation:

Note 1) Bonds payable

Bonds payable = ( 500 convertible bonds x $ 1000 ) x 0.82192 + ( 500 convertible bonds x $ 1000 ) x 5% x 4.4518

= 500000 x 0.82192 + 500000 x 5% x 4.4518

= 410960 + 111295 = $ 522255

Note 2) Interest Expense

Interest Expense = Bonds payable ( Note 1 ) x risk rate = $ 522255 x 4% = 20890

Note 3) Cash Paid = ( 500 convertible bonds x $ 1000 ) x Interest rate = $ 500000 x 5% = $ 25000

Note 4) On January 1, 2021, 100 of the bonds were converted into common shares

Bond payable balance as on On January 1, 2021, = $ 522255 - $ 4110 = $ 518145

Bonds converted to shares = $ 518145 x 100/500 = $ 103629

Note 5) On January 1, 2021, Contributed surplus – conversion rights

Contributed surplus – conversion rights = Contributed surplus balance x 100/500 = $ 12745 x 100/500 = $ 2549

Note 6) On June 30, 2021, 100 of the bonds were converted into common shares

Bond payable balance as on June 30, 2021 = Bond payable balance as on On January 1, 2021 - Converted as on January 1, 2021 = $ 518145 -$ 103629 = $ 414516

Bonds converted to shares = $ 414516 x 100 / 400 = $ 103629

Note 7) On June 30, 2021, Contributed surplus – conversion rights

Contributed surplus – conversion rights =  Contributed surplus balance x 100/400 = ( $ 12745 - $ 2549 ) x 100/400 = $ 2549

Note 8) Interest expense = ( $ 522255 - $ 4110 ) x 4% x 6/12 x 100/400 = $ 518145 x 4% x 6/12 x 100/400 = $ 2591

Note 9) Interest expense = ( 522255 - 4110 - 103629 - 103629 ) x 4% = 310887 x 4% = $ 12435

Note 10) Cash = ( 500000 - 100000 - 100000 ) x 5% = 300000 x 5% = $ 15000 ( out of 500 convertable bonds 100 converted as on jan 1 2021 and 100 converted as on June 30 2021 , balance 300 bonds at face value $ 1000)

Note 11) Blances as on Jan 1 2022

Bond payable as on Jan 1 2022

Jan. 1, 2020	$ 522255
Less:
Dec. 31, 2020	$ 4110
Jan. 1, 2021	$ 103629
Jun. 30, 2021	$ 103629
Dec. 31, 2021	$ 12435
Jan 1 2022 balance	$ 308322

Contributed surplus – conversion rights = $ 12745 - $ 2549 - $ 2549 = $ 7647

Loss on redemption = Fair value - Book value as on Jan 1 2022 = $ 311500 - $ 308322 = $ 3178

Common shares = Bond payable as on Jan 1 2022 + Contributed surplus – conversion rights as on Jan 1 2022 = $ 308322 + $ 7647 = $ 315969

Cash Paid = Number of Bonds x Offer price = ( 500 -100-100 ) x $ 18 = $ 5400

Retained earnings = Cash Paid - Loss on redemption = $ 5400 - $ 3178 = $ 2222

Kindly give a positive rating.