Question

Sheridan Inc. issued $3,240,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $57,600, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Sheridan Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2018, $324,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash. Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) (a) August 1, 2018. (Assume the book value method is used.) (b) August 31, 2018. (c) December 31, 2018, including closing entries for end-of-year.

Answer 1

Part a)

The journal entries are provided as below:

Date	Account Titles	Debit	Credit
August 1, 2018	Bonds Payable	$324,000
	Discount on Bonds Payable		$5,136
	Common Stock (8*324*100)		$259,200
	Paid-in Capital in Excess of Par [(324,000 - 5,136) - 259,200]		$59,664
	(To record the issuance of 2,592 shares of common stock in exchange for $324,000 of bonds and write-off the discount on bonds payable)
August 1, 2018	Interest Payable (324,000*12%*1/12)	$3,240
	Cash		$3,240
	(To record payment in cash of interest accrued on bonds converted)

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Notes:

The calculations relating to journal entry 1 (above) are given as below:

Unamortized Discount on Bonds Payable:
Amount to be Amortized Over 120 Months	57,600
Monthly Amortization (57,600/120)	480
Total Discount Amortized from July 1, 2017 to 31st July 2018 (13*480)	6,240
Unamortized Discount Balance as on 31st July 2018 (57,600 - 6,240)	51,360
10% Applied to Bonds Converted (51,360*10%)	5,136
Balance as on 1st August 2018 (51,360 - 5,136)	46,224
Amount to be Amortized Over Remaining 107 (120 - 13) Months (46,224/107)	432

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Part b)

The journal entries are prepared as follows:

Date	Account Titles	Debit	Credit
August 31, 2018	Interest Expense	$432
	Discount on Bonds Payable		$432
	(To record amortization of 1 month's discount on balance bonds)
August 31, 2018	Bond Interest Expense [(3,240,000 - 324,000)*12%*1/12]	$29,160
	Interest Payable		$29,160
	(To record accrual of interest for August on balance bonds)

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Part c)

The journal entries are given as below:

Date	Account Titles	Debit	Credit
December 31, 2018	Interest Expense	$432
	Discount on Bonds Payable		$432
	(To record amortization of 1 month's discount on balance bonds)
December 31, 2018	Bond Interest Expense [(3,240,000 - 324,000)*12%*1/12]	$29,160
	Interest Payable		$29,160
	(To record accrual of interest for December on balance bonds)
December 31, 2018	Income Summary	$378,120
	Interest Expense		$378,120
	(To close expense account)

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Notes:

The calculation of total bond interest expense is given as follows:

Bond Interest Expense:
Cash Interest Paid (3,240,000*12%*1/12*7 + 3,240,000*90%*12%*1/12*5)	372,600
Amortization of Discount (7*480 + 5*432)	5,520
Bond Interest Expense	$378,120