Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2018. (c) March 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method

Date

Description

DEBIT

CREDIT

December 31, 2018

Bond Interest Expense

$156,000

Premium on Bonds ($80,000 x 1/20)

$4,000

Cash ($4,000,000 X 8% X 6/12)

$160,000

Being interest expense recorded

Date

Description

DEBIT

CREDIT

January 1, 2019

Bonds Payable

$400,000

Premium on Bonds (64,000*10%)

$6,400

Common Stock [8 X $100 X ($400,000/$1,000)]

$320,000

Paid-in Capital in Excess of Par (80,000+6,400)

$86,400

Being bonds are converted into common stock

Date

Description

DEBIT

CREDIT

March 31, 2019

Bond Interest Expense

$7,800

Premium on Bonds [(6400/8) x 3/12]

$200

Bond Interest Payable (400,000 x 8% x 3/12)

$8,000

Being interest expense are recorded

Bonds Payable

$400,000

Premium on Bonds Payable (6400-200)

$6,200

Common Stock

320,000

Paid-in Capital in Excess of Par

86,200

Being $400,000 of debentures are converted on March 31, 2019

Date

Description

DEBIT

CREDIT

June 30, 2019

Bond Interest Expense

$124,800

Premium on Bonds Payable (80,000 x 80% x 1/20)

$3,200

Bond Interest Payable (400,000 x 8% x 1/4)

$8,000

Cash [(3,200,000 x 8% x 1/2) +8000]

$136,000

Being interest on bonds payable paid