Question

On January 1, 2018, Madison Products issued $41.5 million of 6%, 10-year convertible bonds at a net price of $42.45 million. Madison recently issued similar, but nonconvertible, bonds at 98 (that is, 98% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison’s no par common stock. Madison records interest by the straight-line method. On June 1, 2020, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2020. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted. Required:

1. & 2. Prepare the journal entry for the issuance of the bonds by Madison and interest payment for the June 30, 2018. 3. Prepare the journal entries for the June 30, 2020, interest payment by Madison and the conversion of the bonds (book value method).

Answer 1

Solution:
1&2.	Event	General Journal	Debit	Credit
	1.	Cash	42,450,000
		Convertible bonds payable		40,670,000
		Equity -conversion option		1,780,000
	Working Notes:
		Convertible bonds payable = Face value x 98%	[98% as recently bond issued at 98%, that suggest only bond they can issued at 98%]
		=$41,500,000 x 98%
		=$40,670,000
		Equity -conversion option = Issued value - Convertible bonds payable
			=$42,450,000 -40,670,000
			=$1,780,000
		Cash = issued value = $42,450,000
	Event	General Journal	Debit	Credit
	2.	Interest expense	1,286,500
		Convertible bonds payable		41,500
		Cash		1,245,000
	Working Notes:
		Cash = amount paid as coupon = face value x (6%/2)
		=$41,500,000 x 3%
		=$1,245,000
		Convertible bonds payable = discount /no. of coupon
		= (face value - Convertible bonds payable)/(10 x 2)
		=(41,500,000 - 40,670,000)/20
		=830,000/20
		=$41,500        amortization of discount
		Interest expense = coupon + amortization of discount
		=$1,245,000 + $41,500
		=$1,286,500
3.
	Event	General Journal	Debit	Credit
	1.	Interest expense	1,286,500
		Convertible bonds payable		41,500
		Cash		1,245,000
	Working Notes:
		Cash = amount paid as coupon = face value x (6%/2)
		=$41,500,000 x 3%
		=$1,245,000
		Convertible bonds payable = discount /no. of coupon
		= (face value - Convertible bonds payable)/(10 x 2)
		=(41,500,000 - 40,670,000)/20
		=830,000/20
		=$41,500        amortization of discount
		Interest expense = coupon + amortization of discount
		=$1,245,000 + $41,500
		=$1,286,500
	Event	General Journal	Debit	Credit
	2.	Convertible bonds payable	40,877,500
		Equity—conversion option	1,780,000
		Common stock		42,657,500
	Working Notes:
		Convertible bonds payable book value
		At initial point	40,670,000
		+ Amortized till June 30, 2020	207,500
		5 coupons
		[5 x 41,500 ]
		Convertible bonds payable at conversion	40,877,500
		Equity—conversion option	1,780,000	from 1st entry
		Common stock = [ Equity—conversion option + Convertible bonds payable ]
			=$1,780,000 + 40,877,500
			=$42,657,500
Please feel free to ask if anything about above solution in comment section of the question.