Question

Problem 16-2 Shamrock Inc. issued $3,120,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $49,200, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Shamrock Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2018, $312,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash. Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) (a) August 1, 2018. (Assume the book value method is used.) (b) August 31, 2018. (c) December 31, 2018, including closing entries for end-of-year.

Answer 1

Journal Entries

(a) August 1, 2018

(1) Dr. 12% Convertible Bonds a/c....................$ 312000

Cr. Share Capital a/c...................................$ 249600

Cr. Securities Premium a/c.........................$62400

(2)Dr. Interest on bonds a/c......................$31200

Cr. 12% Convertible Bonds a/c.............$31200

(3) Dr.12% Convertible Bonds a/c ...........$ 3120

Cr. Bank a/c.......................................$3120

(4) Dr. Profit & loss a/c / Reserve & Surplus a/c...............$4387

Cr. Discount on Issue of Bonds a/c.............................$4387

(b) August 31, 2018

(1) Dr. Interest on Bonds a/c....................................28080

Cr. 12% Convertible Bonds a/c..........................28080

(2) Dr. Profit & Loss a/c ......................................369

Cr. Discount on Issue of Bonds a/c...............369

(c) Dec, 31, 2018

(1) Dr. Interest on Bonds a/c....................................28080

Cr. 12% Convertible Bonds a/c..........................28080

(2) Dr. Profit & Loss a/c ......................................369

Cr. Discount on Issue of Bonds a/c...............369

Working Notes :

(i) Computation of No. of shares issued & Security Premium

Book Value of Bonds Converted = $312000

No. of Shares to be issued = $(312000/1000)*8

= 2496

Book Value of Shares = 2496*100

= 249600

Securities Premium = 312000-2496000

= 62400

(ii) Interest on Bonds converted (i.e.312000*12%*1/12) is paid in cash on date of conversion.

(iii) Unamortised Discount on issue of bonds converted will be transferred to P&L or R&S.

Computation of unamortised balance -

Discount on value of bonds converted = (49200/3120000)*312000

= 4920

Unamortised balance as on 1 aug. 2018 = 4920 - [(4920*13)/120)

= 4387

(iv) Interest on bonds due on 31 aug. 2018 = [(3120000-312000)*12%]/12

= 28080

(v) Discount on issue after conversion = 49200-4920

= 44280

Amortisation every month after conversion = 44280/120

= 369