Question

On January 1, 2018, 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, 2022, interest payment by both Gless and Century assuming both use the straight-line method.
3. On July 1, 2023, 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).

On July 1, 2023, 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). (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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• Record the entry for Gless regarding the conversion of the bonds.

Note: Enter debits before credits.

	Date General Journal Debit Credit July 01, 2023

• Record the entry for Century regarding the conversion of the bonds.

Note: Enter debits before credits.

	Date General Journal Debit Credit July 01, 2023

Answer 1

1.

Date	General Journal	Debit	Credit
January 1, 2018	Cash [10000000/100*101]	10100000
	convertible bonds payable		10000000
	Premium on bonds payable		100000
	[Being issuance of the bonds by Gless recorded]
January 1, 2018	Investment in  convertible bonds[10000000*15%]	1500000
	Premium on bonds investment[100000*15%]	15000
	Cash		1515000
	[Being bond investment purchased by Century]

2.

Date	General Journal	Debit	Credit
June 30, 2022	Interest expense	347500
	Premium on bonds payable[100000 / 40 periods]	2500
	Cash [10000000*7%*6/12]		350000
	[Being interest payment by both Gless recorded]
June 30, 2022	Cash [350000*15%]	52500
	Premium on bonds investment[2500*15%]		375
	Interest revenue		52125
	[Being interest received by Century recorded]