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Chapter 16: Q2E (page 875)

(Conversion of Bonds) Aubrey Inc. issued \(4,000,000 of 10%, 10-year convertible bonds on June 1, 2017, at 98 plus accrued interest. The bonds were dated April 1, 2017, with interest payable April 1 and October 1. Bond discount is amortized semi-annually on a straight-line basis.On April 1, 2018, \)1,500,000 of these bonds were converted into 30,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a) Prepare the entry to record the interest expense at October 1, 2017. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)

(b) Prepare the entry(ies) to record the conversion on April 1, 2018. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made

Short Answer

Expert verified

a. Interest payable and interest expense will be debited. Discount on bonds payable and cash will be credited.

b. Bonds Payable and Interest Expense will be debited. Discount on Bonds Payable and Cash will be credited.

Step by step solution

01

Journal entry and calculation of (a)

Date

Transactions

Debit

Credit

Interest Payable ($200,000 X 2/6)

$66,667

Interest Expense ($200,000 X 4/6) + $2,712

$136,045

Discount on Bonds Payable

$2,712

Cash ($4,000,000 X 10% ÷ 2)

$200,000

Calculations:

Par value

$4,000,000

Issuance price

(3,920,000)

Total discount

$80,000

Months remaining

(10 years x 12 months- 2 months of Nov. and Dec. )

118

Discount per month ($80,000 ÷ 118)

$678

Discount amortized (4 X $678)

$2,712

02

Journal entry and calculation of (b)

Date

Transactions

Debit

Credit

Bonds Payable

$1,500,000

Interest Expense ($200,000 X 4/6) + $2,712

$27,458

Common stock (30,000 x $20)

$600,000

Cash (Bal. figure)

$872,542

Calculations:

Discount related to 3/8 of the bonds ($80,000 X 3/8)

$30,000

Less: Discount amortized [($30,000 ÷ 118) X 10]

$2,542

Unamortized bond discount

$27,458

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Most popular questions from this chapter

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

DiCenta Corporation reported net income of \(270,000 in 2017 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of \)5 per share. DiCenta’s tax rate is 40%. Compute DiCenta’s 2017 diluted earnings per share.

E16-29 (L06) (Stock-Appreciation Rights) On December 31, 2013, Beckford Company issues 150,000 stock-appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of \(10. The fair value of the SARs is estimated to be \)4 per SAR on December 31, 2014; \(1 on December 31, 2015; \)10 on December 31, 2016; and $9 on December 31, 2017. The service period is 4 years, and the exercise period is 7 years.

Instructions

(a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stockappreciation rights plan.

(b) Prepare the entry at December 31, 2017, to record compensation expense, if any, in 2017.

(c) Prepare the entry on December 31, 2017, assuming that all 150,000 SARs are exercised.

IFRS16-3 Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of \(400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of \)35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS.

(a) Prepare the entry to record issuance of the bonds at par under GAAP.

(b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance.

(c) Which approach provides the better accounting? Explain.

Question: . Mae Jong Corp. issues \(1,000,000 of 10% bonds payable which may be converted into 10,000 shares of \)2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will:

(a) first assign a value to the equity component, then determine the liability component.

(b) assign no value to the equity component since the conversion privilege is not separable from the bond.

(c) first assign a value to the liability component based on the face amount of the bond.

(d) use the “with-and-without” method to value the compound instrument.
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