Question

On January 1, 2021, Gless Textiles issued $10 million of 7%, 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 15% 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.

2. Prepare the journal entries for the June 30, 2025, interest payment by both Gless and Century assuming both use the straight-line method.

3. On July 1, 2026, 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).

Answer 1

required 1 Gless Textiles Date Account Title and Explanation Debit credit 01-Jan-18 Cash $ 10,100,000 Convertible Bonds Payable Premium on issue of Bonds (record the issue of bonds) $10,000,000 X 101% 10,000,000 100,000 $10,000,000 X 1% $ Century service Date Account Title and Explanation 01-Jan-18 Investment in Convertible Bonds Premium on Bond Investment Cash (record the purchase of bonds) Debit $ 1,500,000 $ 15,000 credit $10,000,000*15% $100,000*15% 1,515,000 $10,100,000 X 15%

required 2 Gless Textiles credit Date Account Title and Explanation 30-Jun-22 Interest Expense Debit $ $ 347,500 2,500 Premium on Issue of Bonds $350,000 - $2,500 $100,000 / 40 350,000 $10,000,000 X 7% X 6/12 Cash $ credit (record the payment of interest) Century service Date Account Title and Explanation 30-Jun-22 Cash Interest Revenue Premium on Bond Investment Debit $ 52,500 $ $350,000 X 15% 52,125 $52,500 - $375 375 $15,000 / 40 (Record the interest recd.)

required 3 Gless Textiles Date Account Title and Explanation Debit credit $ 1,500,000 10875 01-Jul-23 Convertible Bonds Payable Premium on issue of Bonds Common Stock |(Record the converison of convertible bonds) Century service $10,000,000 x 15% (100,000 - (2500 x 11)) x15% 1,510,875 1500000 +10875 $ credit Debit $ 1,510,875 Date Account Title and Explanation 01-Jul-23 Investment in Common Stock Investment in Convertible Bonds Premium on Bond Investment (record the bonds conversion) 1,500,000 10,875