Explore BrainMass
Share

Accounting for Bond Conversions

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

E16-6 (Conversion of Bonds) On January 1, 2007, Gottlieb Corporation issued $4,000,000 of 10-year,
8% convertible debentures at 102. Interest is to be paid semiannually 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, 2008.

On January 1, 2009, $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, 2009. 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.

Instructions

Make the necessary journal entries for:
(a) December 31, 2008. (c) March 31, 2009.
(b) January 1, 2009. (d) June 30, 2009.
Record the conversions using the book value method.

© BrainMass Inc. brainmass.com October 25, 2018, 4:56 am ad1c9bdddf
https://brainmass.com/business/accounting/accounting-for-bond-conversions-400719

Solution Preview

First, the premium on the bonds issued at January 1, 2007 was $4,000,000*.02, or $80,000. It is amortized over 20 semi-annual periods (i.e., twice per year for 10 years) at $80,000/20, or $4,000 per period.

(a) December 31, 2008.

12/31/08 Premium on Bonds Payable 4,000 ($80,000/20)
Interest Expense 156,000
Cash 160,000 ($4,000,000*.08/2)
To record the bond premium amortization and interest payment on bonds.

(b) January 1, 2009

Because $400,000 is 10 percent of $4,000,000 (i.e., $400,000/$4,000,000=.10), the premium attributable to the portion being converted is $80,000*.10, or $8,000. By now, the company has amortized the premium on all $4,000,000 of bonds by $4,000*4 semi-annual periods, or $16,000. Thus, it has amortized $16,000*.10, or $1,600 on the portion being converted. The outstanding premium is $8,000 - $1,600, or $6,400. There is no gain or loss on ...

Solution Summary

This solution illustrates, in detail, how to compute the bond premium amortization and loss or gain on conversion of bonds to common stock, as well as the journal entries involved in accruing interest, recording bond conversions, and paying accrued interest.

$2.19
See Also This Related BrainMass Solution

P16-2 (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc.

P16-2 (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued
$2,500,000 of convertible 10 -year bonds on July 1, 2012. The bonds
provide for 12% interest payable semiannually on January 1 and July 1. The discount
in connection with the issue was $54,000 , which is being amortized monthly on a
straight-line basis.
The bonds are convertible after one year into 8 shares of Volker Inc.'s $100
par value common stock for each $1,000 of bonds.
On August 1, 2013, $250,000 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.

Note: Due to rounding and significant digits, there may be slight number differences.
Instructions:
Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates: (Round to the nearest dollar.)

(a) August 1, 2013. (Assume the book value method is used.)

Aug 1, 13 Account Title Amount
Account Title Amount
Account Title Amount
Account Title Amount

Enter entry memorandum.

Area for calculations as desired.
Area for calculations as desired.

Aug 1, 13 Account Title Amount
Account Title Amount
Enter entry memorandum.

(b) August 31, 2013.

Aug 31, 13 Account title Formula
Account title Amount
Enter entry memorandum.

Area for calculations as desired.

Aug 31, 13 Account Title 22,500
Account Title Amount
Enter entry memorandum.

(c) December 31, 2013, including closing entries for end-of-year.

Dec 31, 13 Account Title Amount
Account Title Amount
Enter entry memorandum.

Schedule 1 - Monthly Amortization Schedule
Unamortized discount on bonds payable:
Amount to be amortized over 120 months Amount
Text title Formula
Text title Formula
Text title Formula
Text title Formula
Text title Formula
Text title Formula

Schedule 2 Interest Expense Schedule
Amortization of bond discount charged to bond interest expense in 2013 would be as follows:
Text title Formula
Text title Formula
Total Formula

Interest on Bonds:
Text title Formula
Text title Formula
Text title Formula
Text title Formula
Interest for 2013 would be as follows:
Text title Formula
Text title Formula
Total Formula

Total interest
Text title Formula
Text title Formula
Text title Formula

View Full Posting Details