Question

On January 1, 2021, Gless Textiles issued $29 million of 8%, 20-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99 (that is, 99% of face amount). Century Services purchased 10% of the issue as an investment.

Required:
1. Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond investment by Century.
2. Prepare the journal entries for the June 30, 2025, interest payment by both Gless and Century assuming both use the straight-line method.
3. On July 1, 2026, when Gless’s common stock had a market price of $33 per share, Century converted the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method).

Answer 1

1. Gless

Date	General Journal	Debit	Credit
January 01, 2021	Cash		29,290,000
	Convertible bonds payable			29,000,000
	Premium on bonds payable			290,000
	Century
January 01, 2021	Investment in convertible bonds		2,900,000
	Premium on bond investment		29,000
	Cash			2,929,000

2. Gless

Date	General Journal	Debit	Credit
June 30, 2025	Interest expense		1,152,750
	Premium on bonds payable		7,250
	Cash			1,160,000
	Century
June 30, 2025	Cash		1,160,000
	Premium on bond investment			725
	Interest revenue			1,159,275

3. Gless

Date	General Journal	Debit	Credit
July 01, 2026	Convertible bonds payable		2,900,000
	Premium on bonds payable		21,025
	Common stock			2,921,025
	Century
July 01, 2026	Investment in common stock		2,921,025
	Investment in convertible bonds			2,900,000
	Premium on bond investment			21,025

Explaination

1. Gless (Issuer)

Cash (101% × $29 million) = $29,290,000

Convertible bonds payable (face amount) = $29,000,000

Premium on bonds payable (difference) = $290,000

Century (Investor)

Investment in convertible bonds (10% × $29 million) = $2,900,000

Premium on bond investment (difference) = $29,000

Cash (101% × $2.9 million) = $2,929,000

2.

Gless (Issuer)

Interest expense ($1,160,000– $7,250) = $1,152,750

Premium on bonds payable ($290,000 ÷ 40) = $7,250

Cash (4% × $29,000,000) = $1,160,000

Century (Investor)

Cash (4% × $29,000,000) = $1,160,000

Premium on bond investment ($29,000 ÷ 40) = $725

Interest revenue ($1,160,000– $725) = $1,159,275

[Using the straight-line method, each interest entry is the same.]

3.

Gless (Issuer)

Convertible bonds payable (10% of the account balance) = $2,900,000

Premium on bonds payable (($290,000 – [$7,250 × 11]) × 10%) = $21,025

Common stock (to balance) = $2,921,025

Century (Investor)

Investment in common stock = $2,921,025

Investment in convertible bonds (account balance) = $2,900,000

Premium on bond investment ($29,000 – [$725 × 11]) = $21,025