Question

Chips Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for 12% interest payable semiannually on January 1 and July 1 and Chips uses effective interest amortization. On the date of issuance, the market rate of interest was 14%. The bonds are convertible after one year into 8 shares of Chips Inc.'s $100 par value common stock for each $1,000 of bonds.

On Jan 1, 2022, $250,000 of bonds were turned in for conversion into common stock.

1. Prepare the journal entry for the original issuance

2. Prepare an amortization schedule through 1/1/22

3. Prepare the journal entry for the conversion on 1/1/22.

Answer 1

Face Value	$ 2,500,000.00
Coupon rate (semiannually) = 12%/2	6%
Coupon payment	$    150,000.00
YTM = 14%/2	7%
Period = 10 x 2	20
Present value of Bonds = PV(7%,20,-150000-2500000)	$2,235,149.64
1)
Account Titles and Explanation	Debit	Credit
Cash	$2,235,149.64
Discount on Bonds Payable	$    264,850.36
Bonds Payable		$ 2,500,000.00
2)
Amortization schedule
A	B	C	D	E
Period	Interest Payment = 6% x face value	Interest Expenses = 7% x Carrying value of bond (Prev. year)	Amortization of Bonds discount	Carrying Value of Bonds
1-Jul-20				$2,235,149.64
1-Jan-21	$    150,000.00	$156,460.48	$6,460.48	$2,241,610.12
1-Jul-21	$    150,000.00	$156,912.71	$6,912.71	$2,248,522.83
1-Jan-22	$    150,000.00	$157,396.60	$7,396.60	$2,255,919.43
3)
Account Titles and Explanation	Debit	Credit
Bonds Payable	$    250,000.00
Discount on Bonds Payable $7396.60 x 250/ 2500 bonds)	$           739.66
Common Stock (8 shares × 250 bonds × $100 par)		$    200,000.00
Paid-in Capital in Excess of Par[($250,000 - $739.66) - $200,000)		$      50,739.66
(To record the issuance of 2,000 shares of common stock in exchange for $250,000 of bonds and the write-off of the discount on bonds payable