Question

On January 1, 2016, Gless Textiles issued $20 million of 9%, 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 10% 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. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 2. Prepare the journal entries for the June 30, 2020, interest payment by both Gless and Century assuming both use the straight-line method. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3. On July 1, 2021, 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). (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) HintsReferenceseBook & Resources Hint #1

Answer 1

Solution:

1) Preparing the Journal Entrues for the Issuance of the Bonds by Gless and the Purchase of the Bond Investment by Century:

Event	General Journal	Debit	Credit
1	Gless (Issuer)
	Cash (101% * $20 Million)	$20,200,000
	Convertible Bonds Payable		$20,000,000
	Premium on Bonds Payable		$200,000
	(To Record the Issuance of 9% Convertible Bonds)
2	Century (Investor)
	Investment in convertible bonds (10% * $20 million)	$2,000,000
	Premium on bond investment	$20,000
	Cash (101% * $2 million)		$2,020,000
	(To Record the Investment in Bonds)

2) Preparing the Journal Entries for the June 30, 2020, Interest Payment by both Gless and Century by Assuming both the Companies uses the Striaght Line Method:

Event	General Journal	Debit	Credit
1	Gless (Issuer)
	Interest Expense ($900,000 - $5,000)	$895,000
	Premium on Bonds Payable ($200,000 / 40)	$5,000
	Cash (4.5% * $20 Million)		$900,000
	(To Record the Semiannual Interest on Bonds)
2	Century (Investor)
	Cash (4.5% * $2 million)	$90,000
	Premium on bond Investment ($20,000 / 40)		$500
	Interest Income ($90,000 - $500)		$89,500
	(To Record the Semiannual Interest Received)

3) Preparing the Journal Entries by both Gless and Century Conversion of the Bonds:

Event	General Journal	Debit	Credit
1	Gless (Issuer)
	Convertible Bonds Payable (10% of the Account Balance)	$2,000,000
	Premium on Bonds Payable [$200,000 - ($5,000 * 19) * 10%]	$10,500
	Common Stock		$210,500
	(To Record the Conversion of Bond into Stock)
2	Century (Investor)
	Investment in Common Stock	$210,500
	Investment in Convertible Bonds		$2,000,000
	Premium on Bonds Investment [$20,000 - ($500*19)]		$10,500
	(To Record the Conversion of Bond into Stock)