Question

On January 1, 2021, Madison Products issued $41.2 million of 8%, 10-year convertible bonds at a net price of $42.12 million. Madison recently issued similar, but nonconvertible, bonds at 97 (that is, 97% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison’s no par common stock. Madison records interest by the straight-line method.

On June 1, 2023, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2023. By June 30, all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted.

Required:

1. & 2. Prepare the journal entries for the issuance of the bonds by Madison and interest payment for June 30, 2021.
3. Prepare the journal entries for the June 30, 2023, interest payment by Madison and the conversion of the bonds (book value method).

Answer 1

1&2. JOURNAL ENTRIES:

DATE	PARTICULARS	AMOUNT [DR] ($ in millions)	AMOUNT [CR] ($ in millions)
Jan 1, 2021	Bank a/c Dr To 8% convertible bonds a/c To Securities premium a/c [Being 8% convertible bonds issued at a premium of total $0.92 million as above]	42.12	41.2 0.92
Jan 1, 2021	Bank a/c Dr Discount on issue of bonds a/c Dr To 8% non - convertible bonds a/c [Being 8% non – convertible bonds issued at a discount as above]	39.964 1.1236	41.2
Jun 30, 2021	Interest on bonds a/c Dr To Bank a/c [being payment of interest of half year for both convertible and non – convertible bonds]	3.296	3.296

NOTE:

Here we have assumed that the recent issue of non – convertible bonds is done on the same date i.e. jan 1,2021 as there is no relevant date give for that issue.

3. JOURNAL ENTRIES

DATE	PARTICULARS	AMOUNT [DR] ($ in millions)	AMOUNT [CR] ($ in millions)
Jun 30, 2023	Interest on bonds a/c Dr To Bank a/c [being payment of interest of half year for both convertible and non – convertible bonds]	3.296	3.296
Jun 30, 2023	8% convertible bonds a/c Dr Premium on redemption a/c Dr To bondholders a/c [Being 8% non – convertible bonds being redeemed]	41.2 0.412	41.612
Jun 30, 2023	Bondholders a/c Dr To Share capital a/c [being conversion of bonds into shares total of 41,612 numbers]	41.612	41.612

NOTE:

In both the answers given above the entries to the profit & loss a/c are skipped and can be passed as necessary.