Question

Problem 16-02

Concord Inc. issued $2,400,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $56,400, which is being amortized monthly on a straight-line basis.

The bonds are convertible after one year into 8 shares of Concord Inc.’s $100 par value common stock for each $1,000 of bonds.

On August 1, 2021, $240,000 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.

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

(a)		August 1, 2021. (Assume the book value method is used.)
(b)		August 31, 2021.
(c)		December 31, 2021, including closing entries for end-of-year.

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	Aug. 1, 2021
		(To record the issuance of shares of common stock and the write-off of the discount on bonds payable.)
	Aug. 1, 2021
		(To record payment in cash of interest accrued on bonds.)
(b)	Aug. 31, 2021
		(To record amortization of discount on bonds.)
	Aug. 31, 2021
		(To record accrual of interest on bonds.)
(c)	Dec. 31, 2021
		(To close expense account)

Answer 1

Journal Entries:

No	Date	Account Titles and Explanation	Debit	Credit
a)	Aug. 1, 2021	Bonds Payable	$240,000
		Common Stock (8 shares * 240 bonds * $100 par value)		$192,000
		Discount on bonds payable (see working note)		$5,029
		Paid-in Capital in Excess of Par ([$300,000 - $5,029] - $192,000)		$102,971
		(To record the issuance of shares of common stock and the write-off of the discount on bonds payable)
	Aug. 1, 2021	Interest Payable	$2,400
		Cash ($240,000 * 12/100 * 1/12 months)		$2,400
		(To record the payment in cash of interest accrued on bonds)
b)	Aug. 31, 2021	Amortization Expense	$423
		Discount on bonds payable (see working note)		$423
		(To record the amortization of discount on bonds)
	Aug. 31, 2021	Interest Expense	$1,920
		Interest Payable ($192,000*12/100*1/12 months)		$1,920
		(To record the accrual of interest on bonds)
c)	Dec. 31, 2021	Income Summary	$281,405
		Interest Expense (see working note 2)		$281,405
		(To close the expense account)
		Working note:
		Total discount	$56,400
		Monthly amortization ($56,400/120 months)	$470
		Total amortization from July 1 2020 to August 1, 2021 = 13 months * $470 per month)	$6,110
		Unamortized balance ($56,400 - $6,110)	$50,290
		Unamortized balance relating to bonds converted ($50,290*10/100)	$5,029
		Remaining balance ($50,290 - $5,029)	$45,261
		Monthly amortization for remaining 107 months (10 years * 12 months = 120 months - 13 months = 107 months); ($45,261/107 months)	$423
		Working note 2:
		First 7 months ($470 * 7 months)	$3,290
		Second 5 months ($423 * 5 months)	$2,115
		Total Discount for first year	$5,405
		Yearly Interest on bonds ($2,400,000*12/100)	$288,000
		Monthly amount ($288,000/12 months)	$24,000
		Interest on balance amount of $2,400,000 - $240,000 = $2,160,000*12/100	$259,200
		Monthly amount ($259,200/12 months)	$21,600
		First 7 months ($24,000 * 7 months)	$168,000
		Second 5 months ($21,600 * 5 months)	$108,000
		Total interest for first year	$276,000
		Total interest on bonds ($5,405 + $276,000)	$281,405