Question

On January 1, 2021, Gless Textiles issued $28 million of 7%, 10-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 20% 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.

Date	Particulars	Debit	Credit
Jan.01,2021	Cash	$28,280,000
	Convertible bonds payable		$28,000,000
	Premium on bonds payable		$280,000
Jan.01,2021	Investment in convertible bonds	$2,800,000
	Premium on bond investment	$28,000
	Cash		$2,828,000

2.

Date	Particulars	Debit	Credit
June30,2025	Interest Expense	$966,000
	Premium on bonds payable ($280,000/10)*1/2	$14,000
	Cash (28,000,000 * 7% * 6/12)		$980,000
June30,2025	Cash	$98,000
	Premium on bonds investment		$ 1,400
	Interest revenue		$96,600

3.

Date	Particulars	Debit	Credit
July1,2026	Convertible bonds payable	$2,800,000
	Premium on bonds payable [{$280,000 - (14,000*11)}20%	$25,200
	Common stock ( to balance)		$2,825,200
July1,2026	Investment in common stock	$2,825,200
	Investment in convertible bonds		$2,800,000
	Premium on bond investment		$25,200

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