Question

On January 1, 2012, Slug Corporation issued $6 million of 8%, 10-year convertible bonds at 102.The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40shares of $1 par common stock. Fuzz Company purchased 20% of the issue as an investment.On July 1, 2016, Fuzz converted all of its bonds into common stock of Slug. The market price per share for Slug was $32 at the time of the conversion. Both companies use the straight-line method for amortization.

Required:

1. Prepare journal entries for the issuance of the bonds on the issuer and the investor books.

2. Prepare the journal entries for the conversion on the books of the issuer and the investor

Answer 1

Slug Corporation Debit in $ Credit in $ Journal Enteries Trans. Particulars 1 Issuer - Issuance Cash a/c Dr. To Convertible Bonds Payable To Premium on Bonds Payable 6000000 x 102% = 6120000 6120000 6000000 120000 Investor - Purchased 20% of issue Investment in Convertible Bondsa/c Dr. Premium on Bond Investment a/c Dr. To Cash 6000000 x 20% = 1200000 x 102% = 1224000 1200000 24000 1224000 Issuer - Conversion 9 semiannual periods Later Convertible Bonds Payable a/c Dr. 1200000 Premium on Bonds Payable a/c Dr. 13200 To Common Stock To Paid in Capital in excess of Par 1200 x 40 x $1 = $48000 (24000 - (24000 x 9/20)) = 13200 48000 1165200 Investor - Conversion 9 semiannual periods Later Investment in Common Stock a/c Dr. 1213200 To Investment in convertible Bonds To Premium on Bonds Investment 1200000 13200