Question

(Conversion of Bonds) Telta Inc. issued $15,000,000 of 12%, 40-year convertible bonds on November 1, 2017, at 97 plus accrued interest. The bonds were dated July 1, 2017, with interest payable January 1 and July 1. Bond discount (premium) is amortized semiannually on a straight-line basis. On July 1, 2018, one-half of these bonds were converted into 60,000 shares of $1 par value common stock. Accrued interest was paid in cash at the time of conversion.

Instructions:

(a) Prepare the entry to record the interest expense at December 31, 2017. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)

(b) Prepare the entry(ies) to record the conversion on July 1, 2018. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

Answer 1

Telta Inc

1. Entry to record interest expense at Dec 31, 2017:

Date	Account Titles and Explanation	Ref. Post	Debit	Credit
31-Dec-17	Interest Expense		$301,875
	Interest Payable		$600,000
	Discount on Bonds Payable			$1,875
	Cash			$900,000
	(To record interest expense, interest payable and discount on bonds payable)

Bonds dated – July 1, 2017

Bonds issue date = Nov1, 2017

Semiannual interest expense - $15,000,000 x 12% x 6/12 = 900,000

Accrued interest on date of issue, July 1 – Nov 1 (4 months) = 900,000 x 4/6 = $600,000

Interest expense as on Dec’ 31, 17 = 900,000 x 2/6 = $300,000

Discount on bonds payable –

Face value = $15,000,000

Issue price = $15,000,000 x 97% = $14,550,000

Discount on bonds payable = 15,000,000 – 14, 550,000 = $450,000

Period to maturity = 40 x 2 = 80 semiannual periods

Straight line discount on bond amortization = 450,000/80 = $5,625

Discount on bond amortization for two months, Nov 1 – Dec 31, 2017 = 5,625 x 2/6 = $1,875

1. Conversion on July 1, 2018:

Date	Account Titles and Explanation	Ref. Post	Debit	Credit
1-Jul-18	Bonds Payable		$7,500,000
	Discount on Bonds Payable			$221,250
	Common Stock			$60,000
	Paid-in Capital in Excess of Par			$7,218,750
	(To record conversion of 50% bonds into 60,000 common shares)

Bonds Payable = $15,000,000

Half converted into 60,000 common shares, so $7,500,000 converted to 60,000 common shares.

Bonds payable converted to 60,000 common shares, par value $1,

Common Stock = 60,000 x $1 = $60,000

Half of discount on bonds payable (converted to common shares) = 450,000 x ½ = $225,000

Accumulated discount on bond amortization – Nov 1, 2017 – July 1, 2017 (8 months) on converted bonds,

= $225,000 x 1/80 x 8/6 = $3,750

Unamortized bond discount = 225,000 – 3,750 = $221,250

Hence, paid-in capital in excess of par = bonds payable – common stock at par value – discount on bonds payable

= $7,500,000 - $60,000 - $221,250 = $7,218,750