Question

Sunland Inc. issued $6 million of 10-year, 10% convertible bonds on June 1, 2020, at 96 plus accrued interest. The bonds were dated April 1, 2020, with interest payable April 1 and October 1. Bond discount is amortized semi-annually. Bonds without conversion privileges would have sold at 95 plus accrued interest.

On April 1, 2021, $1.50 million of these bonds were converted into 30,000 common shares. Accrued interest was paid in cash at the time of conversion. Assume that the company follows IFRS.

Prepare the entry to record the interest expense at October 1, 2020, by pro-rating the number of months. Start by calculating the effective rate on the bonds using (1) a financial calculator or (2) Excel functions. Assume that interest payable was credited when the bonds were issued.

Answer 1

Answer

●Interest Payable =$6000000×8%/2(2/6)

=$80000

●Total Discount

=$6000000 - $(6000000×0.96)

=$240000

●Discount on Bonds payable

Months remaining =118(10×12-2)

Discount per month =$240000/118

=$2034

●Interest Expense =$6000000×8%/2(4/6)

=$160000

Add Discount on Bonds payable =$2034

Total =$162034

Journal Entry to record the interest expense at October 1, 2020   

Account Title and Explanation	Debit ($)	Credit ($)
Interest Payable Interest Expense To Discount on bonds payable To cash (To record the interest expense)	$80000 $162034	$2034 $240000