Question

Problem 8 Rockne, Inc. issued $500,000 face value of convertible 10-year, 11% stated rate bonds on July 1, 2014. The interest is payable semiannually on December 31 and June 30. The discount in connection with the issue was $4,750, which is amortized monthly using the straight-line basis. The bonds are convertible after one year into five shares of Rockne's common stock (no par value) for each $1,000 of bonds. On October 1, 2015, $150,000 face value of the bonds were converted. Interest has been accrued monthly and paid as due. Any interest accrued at the time of conversion of the bonds is paid in cash. Prepare the entries to record the conversion, amortization, and interest as of October 1, 2015.

Answer 1

Points to be noted:

• Bonds of $ 150,000 were converted on Oct 1, 2015.
• The shares were issued at No par. Hence no additional paid-in involved.
• Latest interest was paid on June 30, 2015 before conversion.
• First we calculate Discount Amortization schedule on Bonds with FV $ 150,000:

• Date	Opening Amortisation O/s	Amortised amount		Closing balance o/s
  1-Jul-14	4750*150000/500000 = 1425			1425
  31-Dec-14	1425	1425/20	71.25	1353.75
  30-Jun-15	1353.75	1425/20	71.25	1282.5
  1-Oct-15	1282.5	1425/20*3 months /6 months	35.62	1246.88

• Any interest accrued at conversion are paid in cash.

So, Journal entries are:

1. Intrest:	1/10/15	Interest a/c Dr (	4160.62
		To Discount On Bonds issued (See above bullets)		35.62
		To Cash a/c (150,000* 11% * 3/12)		4125.00
2. Amortization and Conversion	1/10/15	Bonds Payable a/c Dr	150000
		To Discount On Bonds issued (See above bullets)		1246.88
		To Common Stock (No Par) (Balancing Figure)		148753.12

Please comment in case of any query regarding the solution.