Question

Windsor Inc. issued $3,840,000 of 10%, 10-year convertible bonds on June 1, 2020, at 99 plus accrued interest. The bonds were dated April 1, 2020, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2021, $1,440,000 of these bonds were converted into 35,000 shares of $21 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a)		Prepare the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued.
(b)		Prepare the entry to record the conversion on April 1, 2021. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

Answer 1

Answer a

Par Value of Bond payable	$        3,840,000
Less: issuance price of bond payable (3840000*99%)	$        3,801,600
Discount on Bond payable	$              38,400
Accrued Interest (April 1, 2020 to June 1, 2020 = 2 months) (3840000*10%*2/12)	$              64,000
Discount on Bond payable	$              38,400
Divided by: Number of month remaining (10 years * 12 month per year = 120) (120 months -2 months completed = 118)	118
Amortization of discount per month	$                    325
Amortization of discount for 4 months (June 1, 2020 to October 1, 2020 = 4 months) (325*4)	$                1,300
Cash interest for 4 months (June 1, 2020 to October 1, 2020 = 4 months) (3840000*10%*4/12)	$            128,000
Interest expenses	$            129,300
Cash interest paid (3840000*10%*6/12)	$            192,000

Answer A
Date	General Journal	Debit	Credit
October 1, 2020	Interest payable	64,000
	Interest Expenses	129,300
	Cash		192,000
	Discount on Bond payable		1,300
	(To record interest expense at October 1, 2020.)

Answer b

Bond converted	$        1,440,000
Divided by: Issued bond price	$        3,840,000
Percentage of bond redeemed on April 1, 2021	37.50%
Number of month bond hold by bond holder (June 1, 2020 to April 1, 2020 = 10 months)
Discount on Bond payable for bond redeemed (38400*37.50%)	$              14,400
Less: Amortized Discount on Bond payable (14400*10/118)	$                1,220
Unamortized Discount on Bond payable	$              13,180

Answer B
Date	General Journal	Debit	Credit
April 1, 2021	Bond Payable	1,440,000
	Discount on Bond payable		$       13,180
	Common Stock (35000*21)		$     735,000
	Paid in Capital in excess of par value (Balancing Figure) (1440000-13180-735000)		$     691,820
	(To record conversion of bond into 35,000 shares.)