Question

On June 30, 2014, Lipton, Inc. sold $100,000 of 8% bonds for $102,530. The bonds are dated June 30, 2014, pay interest annually on June 30, and will mature on June 30, 2019.

1. If the bonds had been issued as convertible with the option for bond holders to convert each $1,000 bond into 10 shares of $5 par value common stock, record the entry on June 30, 2018 if after interest was paid all bond holders decided to convert their bonds. At the time of conversion $2,500 unamortized premium remained on the bonds.

Answer 1

Definition of Amortization of Premium on Bonds Payable

The amortization of the premium on bonds payable is the systematic movement of the amount of premium received when the company issued the bonds.

The premium was received because the bonds' stated interest rate was greater than the market interest rate.

The amount of the premium is recorded in a separate bond-related liability account. Over the life of the bonds the premium amount will be systematically moved to the income statement as a reduction of Bond Interest Expense.

to pass journal entry for unamortized premium:

Premium on bonds payable A/c Dr $2,500

To Interest expenses for bonds A/c $2,500

Journal entry for interest paid on June 30th 2018:

Interest expenses A/c Dr $8000

To Cash/Bank A/c $8000

Journal entry for conversion of bonds into shares:

Bonds payable A/c Dr. $100,000

To Common Stock A/c $5000 ((100000/1000*10) * $5))

To Paid in capital A/c $95,000