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Question 3 View Policies Current Attempt in Progress Blossom Inc. issued $2,700,000 of convertible 10-year bonds on July 1, 2

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Answer #1
No. Date Account titles and explanation Debit Credit
(a) Aug 1,2021 Bonds payable 270000
Discount on bonds payable (Note:1) 4708
Common stock (270000/1000)*8*100 216000
Paid in capital in excess of par value (Plug) 49292
(To record the issuance of shares of common stock
and the write-off of the discount on bonds payable)
Aug 1,2021 Interest payable (270000*12%*1/12) 2700
Cash 2700
(To record payment in cash of interest accrued on
bonds)
(b) Aug 31,2021 Interest expense (Note:2) 396
Discount on bonds payable 396
(To record amortization of discount on bonds)
Aug 31,2021 Interest expense (2700000*90%*12%*1/12) 24300
Interest payable 24300
(To record accrual of interest on bonds)
c) Dec 31,2021 Income summary (Note:3) 315560
Interest expense 315560
(To close expense account)
Note:1
Face value of bonds issued=$ 2700000
Face value of bonds converted=$ 270000
10% bonds converted
Discount on issue of bonds=$ 52800
Discount amortized on straight-line basis
Life of the bond=10 years=10*12=120 months
Discount to be amortized per month=52800/120=$ 440
Discount amortized from July 1,2020 to Aug 1,2021 (13 months)=440*13=$ 5720
Unamortized discount=52800-5720=$ 47080
Unamortized discount related to bonds converted=47080*10%=$ 4708
Note:2
Unamortized discount related to 90% bonds=47080*90%=$ 42372
Remaining period=120-13=107 months
Discount to be amortized per month=42372/107=$ 396
Note:3
Interest expense includes amortization and monthly bond interest
Amortization:
From Jan 1 to Aug 1 (7 months)=7*440=$ 3080
From Aug 1 to Dec 31 (5 months)=5*396=$ 1980
Total amortization for the year=3080+1980=$ 5060
Interest on bonds:
From Jan 1 to Aug 1 (7 months)=2700000*12%*(7/12)=$ 189000
From Aug 1 to Dec 31 (5 months)=(2700000-270000)*12%*(5/12)=$ 121500
Total interest for the year=189000+121500=$ 310500
Interest expense for the year=5060+310500=$ 315560
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