Question

In: Accounting

On January 1, 2018, Gless Textiles issued $10 million of 7%, 20-year convertible bonds at 101....

On January 1, 2018, Gless Textiles issued $10 million of 7%, 20-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 15% 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, 2022, interest payment by both Gless and Century assuming both use the straight-line method.
3. On July 1, 2023, 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).

Solutions

Expert Solution

Answer 1.
Journal Entry
Date Particulars Dr. Amt. Cr. Amt.
Gless Textiles
1-Jan-18 Cash    10,100,000.00 $10,000,000 X 101%
Convertible Bonds Payable    10,000,000.00
Premium on issue of Bonds          100,000.00 $10,000,000 X 1%
(record the issue of bonds)
Century service
1-Jan-18 Investment in Convertible Bonds      1,500,000.00 $10,000,000*15%
Premium on Bond Investment            15,000.00 $1,000,000*15%
Cash      1,515,000.00 $10,100,000 X 15%
(record the purchase of bonds)
Answer 2.
Journal Entry
Date Particulars Dr. Amt. Cr. Amt.
Gless Textiles
30-Jun-22 Interest Expense          347,500.00 $350,000 - $2,500
Premium on Issue of Bonds               2,500.00 $100,000 / 40
   Cash          350,000.00 $10,000,000 X 7% X 6/12
(record the payment of interest)
Century service
30-Jun-22 Cash            52,500.00 $350,000 X 15%
   Interest Revenue            52,125.00 $52,500 - $375
   Premium on Bond Investment                  375.00 $15,000 / 40
(Record the interest recd.)
Answer 3.
Journal Entry
Date Particulars Dr. Amt. Cr. Amt.
Gless Textiles
1-Jul-23 Convertible Bonds Payable      1,500,000.00
Premium on issue of Bonds            10,875.00 $15,000 - ($375 X 11)
Loss on Conversion of Bonds          469,125.00
   Common Stock      1,980,000.00 $1,500,000 X $33 / $1,000 X 40 shares
(Record the converison of convertible bonds)
Century service
1-Jul-23 Investment in Common Stock      1,980,000.00
   Investment in Convertible Bonds      1,500,000.00
   Premium on Bond Investment            10,875.00
   Profit on Conversion of Bonds          469,125.00
(record the bonds conversion)

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