Question

On January 1, 2018, Madison Products issued $41.4 million of 6%, 10-year convertible bonds at a net price of $42.34 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, 2020, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2020. 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 entry for the issuance of the bonds by Madison and interest payment for the June 30, 2018.
3. Prepare the journal entries for the June 30, 2020, interest payment by Madison and the conversion of the bonds (book value method).

Answer 1

According to the requirement of the question, we have to record journal entries in this problem.

Requirement 1 & 2. Prepare the journal entry for the issuance of the bonds by Madison and interest payment for the June 30, 2018.

Solution :- 1. Prepare the Journal entry to record the issuance of Convertible Bonds.

Date	Account Titles and explanation	Debit ($)	Credit ($)
Jan 1, 2018	Cash	$42,340,000
	Convertible bonds Payable (Working Note)		$40,986,000
	Equity Conversion Option (Working Note)		$1,354,000
	(To record Issuance of Bonds)

Working Note:- Calculation of Convertible Bonds Payable.

Convertible Bonds Payable = Face Value * 99%

Convertible Bonds Payable = $41,400,000 * 99%

Convertible Bonds Payable = $40,986,000

# Calculation of Equity Conversion Option.

Equity Conversion Option = Cash Received - Convertible Bonds Payable

Equity Conversion Option = $42,340,000 - $40,986,000

Equity Conversion Option = $1,354,000

2. Prepare the Journal entry to record the Payment of Interest.

Date	Account Titles and explanation	Debit ($)	Credit ($)
June 30, 2018	Interest Expense (Working Note)	$1,262,700
	Convertible Bonds Payable (Working Note)		$20,700
	Cash (Working Note)		$1,242,000
	(To Record Payment of Interest)

Working Note:- Calculation of Cash

= Cash paid as coupon * Rate * 6/12

= $41,400,000 * 6% * 6/12 = $1,242,000

Interest is for 6 months.

# Calculation of Convertible Bonds Payable.

Convertible Bonds Payable = Discount / No.of Coupon

Convertible Bonds Payable = (Face Value - Convertible Bonds Payable) / (10 * 2)

Convertible Bonds Payable = ($41,400,000 - $40,986,000) / 20

Convertible Bonds Payable = $20,700

# Calculation of Interest Expense = $1,242,000 + $20,700 = $1,262,700

Requirement 3. Prepare the journal entries for the June 30, 2020, interest payment by Madison and the conversion of the bonds (book value method).

Solution:- 1.

Date	Account Titles and explanation	Debit ($)	Credit ($)
June 30, 2018	Interest Expense (Working Note)	$1,262,700
	Convertible Bonds Payable (Working Note)		$20,700
	Cash (Working Note)		$1,242,000
	(To Record Payment of Interest)

Working Note:- Calculation of Cash

= Cash paid as coupon * Rate / 2

= $41,400,000 * 6% / 2 = $1,242,000

Interest is for 6 months.

# Calculation of Convertible Bonds Payable.

Convertible Bonds Payable = Discount / No.of Coupon

Convertible Bonds Payable = (Face Value - Convertible Bonds Payable) / (10 * 2)

Convertible Bonds Payable = ($41,400,000 - $40,986,000) / 20

Convertible Bonds Payable = $20,700 (Amortization)

# Calculation of Interest Expense = $1,242,000 + $20,700 = $1,262,700

2.

Date	Account Titles and explanation	Debit ($)	Credit ($)
June 30, 2018	Convertible Bonds Payable (Working Note)	$41,089,500
	Equity Conversion Option (Working Note)	$1,354,000
	Common Stock (Working Note)		$42,443,500

Working Note:- Calculation of Convertible Bonds Payable.

Convertible bonds payable (Book Value)

At Initial Point = $40,986,000

Add: Amortized till June 30,2020 = $ 103,500

5 Coupons (5 * $20,700)

Convertible Bonds payable at Conversion = $41,089,500

# Equity Conversion Option - This amount will be taken from the first entry i.e. $1,354,000

# Calculation of Common Stock

Common Stock = Equity Conversion Option + Convertible Bonds Payable

Common Stock = $1,354,000 + $41,089,500 = $42,443,500

Thank you..

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