Question

On January 1, 2021, Madison Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.8 million. Madison recently issued similar, but nonconvertible, bonds at 99 (that is, 99% 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

Answer :-

Required 1 & 2 :-

	Date	Particular	Debit	Credit
1)	January 1,2021	Cash A/c. Dr.	$40,800,000
		To Convertible bonds Payable A/c		$40,000,000
		To Premium on Bond Payable A/c (Note -1)		$800,000
		( To record the issuance of the bonds by Madison)
2)	June 30,2021	Interest Expense A/c Dr.	$1,160,000
		Premium on Bond Payable A/c Dr.		$40,000
		To Cash A/c (Note - 2)		$1,200,000
		(To record Interest Payment)

Note 1-

Premium on Bond Payable = Cash - Convertible Bond Payable

Premium on Bond Payable = $40,800,000 - $40,000,000 = $800,000

Note 2 -

Premium on bonds payable = Total Premium on Bond Payable / No. Of coupon

Premium on Bond Payable = $800,000 / (10 × 2) = $40,000

No.of coupon is 20 because it a 10 year Convertible Bond and Interest are Payable semiannually.

Cash = $40,000,000 × 6% × 1/2 = $1,200,000

Interest expense ($1,200,000 – $40,000) = $1,160,000

Required 3 :-

Date	Particular	Debit	Credit
June 30,2023	Interest Expense A/c. Dr.	$1,160,000
	Premium on Bond Payable A/c Dr.	$40,000
	To Cash A/c (Note -3)		$1,200,000
	(To record Interest Payment)
June 30 ,2023	Convertible Bond Payable A/c. Dr.	$40,000,000
	Premium on Bond Payable A/c Dr. (Note -4)	$600,000
	To Common Stock A/c		$40,600,000
	(To record conversion of the Bond)

Note 3 -

Premium on bonds payable = Total Premium on Bond Payable / No. Of coupon

Premium on Bond Payable = $800,000 / (10 × 2) = $40,000

No.of coupon is 20 because it a 10 year Convertible Bond and Interest are Payable semiannually.

Cash = $40,000,000 × 6% × 1/2 = $1,200,000

Interest expense ($1,200,000 – $40,000) = $1,160,000

Note 4 :-

Premium on bonds payable =$800,000 - ($40,000 x 5) = $600,000

Here Total Premium on Bond Payable is subtract with 40,000 × 5 because when the Interest paid some amount of Premium is deducted and till June 30,2013 Interest is paid 5 times.