Question

On January 2, 2018, Phi Company sold $600,000 10% 4-year bonds for $562,740 to yield 12%. Interest is payable semi-annually on June 30^th and December 31^st and each bond is convertible into 18 common stock shares ($7 par value.)   

Required:
(a) Assume 100% of the bonds are converted on July 1, 2019. Prepare the journal entry to record the conversion.

(b) Assume $360,000 of the bonds are converted on July 1, 2019. Prepare the necessary journal entry.

Answer 1

Journal entry to show the conversion of the bonds is as shown below:

	Year	Particulars	L.F	Debit ($)	Credit ($)
	2018
	Jan-02	Cash		562,740
		Unamortized Bond Discount		37,260
		Bond payable			600,000
		(for bond issued for 4 years)
	Year	Particulars	L.F	Debit ($)	Credit ($)
	2018
	Jul-01	Interest expense (562,740*12%*6/12)		33,764
		Unamortized Bond Discount			3,764
		Cash (600,000*10%*6/12)			30,000
		(For interest paid on 10% bonds and amortization of discount)
	Year	Particulars	L.F	Debit ($)	Credit ($)
	2018
	Dec-31	Interest expense (562,740+3,764)*12%*6/12)		33,990
		Unamortized Bond Discount			3,990
		Cash (600,000*10%*6/12)			30,000
		(For interest paid on 10% bonds and amortization of discount)
	Year	Particulars	L.F	Debit ($)	Credit ($)
	2019
	Jul-01	Interest expense (562,740+3,764+3,990)*12%*6/12)		34,230
		Unamortized Bond Discount			4,230
		Cash (600,000*10%*6/12)			30,000
		(For interest paid on 10% bonds and amortization of discount)
(a)	Jul-01	Bonds Payable		600,000
		Additional paid in capital		181,276
		Unamortized Bond discount			25,276
		Common Stock (108,000*7)			756000
		(For bond converted)
(b)	Jul-01	Bonds Payable		360,000
		Additional paid in capital		108,765
		Unamortized Bond discount (25,276/600,000*360,000)			15,165
		Common Stock (64,800*7)			453600
		(For bond converted)