Question

Sage Inc. issued $3,670,000 of 10%, 10-year convertible bonds on June 1, 2020, at 98 plus accrued interest. The bonds were dated April 1, 2020, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2021, $1,376,250 of these bonds were converted into 36,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a)		Prepare the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued.
(b)		Prepare the entry to record the conversion on April 1, 2021. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

Answer 1

Answer a

Par Value of Bond payable	$        3,670,000
Less: issuance price of bond payable (3670000*98%)	$        3,596,600
Discount on Bond payable	$              73400
Accrued Interest (April 1, 2020 to June 1, 2020 = 2 months) (3670000*10%*2/12)	$              61,167
Discount on Bond payable	$              73400
Divided by: Number of month remaining (10 years * 12 month per year = 120) (120 months -2 months completed = 118)	118
Amortization of discount per month (73400/118)	$                    622
Amortization of discount for 4 months (June 1, 2020 to October 1, 2020 = 4 months) (622*4)	$                2488
Cash interest for 4 months (June 1, 2020 to October 1, 2020 = 4 months) (3670000*10%*4/12)	$            122,333
Interest expenses	$            124,821
Cash interest paid (3760000*10%*6/12)	$            188,000

Answer A
Date	General Journal	Debit	Credit
October 1, 2020	Interest payable	61,167
	Interest Expenses	124,821
	Cash		188,000
	Discount on Bond payable		2488
	(To record interest expense at October 1, 2020.)

Answer b

Bond converted	$        1,376,250
Divided by: Issued bond price	$        3,760,000
Percentage of bond redeemed on April 1, 2021	36.60%
Number of month bond hold by bond holder (June 1, 2020 to April 1, 2020 = 10 months)
Discount on Bond payable for bond redeemed (73400*36.60%)	$              26,864
Less: Amortized Discount on Bond payable (26864*10/118)	$                2,277
Unamortized Discount on Bond payable	$              24,587

Answer B
Date	General Journal	Debit	Credit
April 1, 2021	Bond Payable	1,376,250
	Discount on Bond payable		$       24,587
	Common Stock (36000*20)		$     720,000
	Paid in Capital in excess of par value (Balancing Figure) (1376250-24587-720000)	$     631,663
	(To record conversion of bond into 36,000 shares.)