Question

Sheffield Inc. issued $4,320,000 of 9%, 10-year convertible bonds on June 1, 2020, at 99 plus accrued interest. The bonds were dated April 1, 2020, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2021, $1,620,000 of these bonds were converted into 25,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a)		Prepare the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued.
(b)		Prepare the entry to record the conversion on April 1, 2021. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

Answer 1

Ans:

(A)

	Particulars	Amount ($)
1	Par value of bond payable	$4320000
2	Less: Issuance price of bond payable ($4320000*99%)	$4276800
3	Discount on bond payable (1-2)	$43200
3	Accrued interest (April 1,2020 to June 1, 2020= 2 months) ($4320000*10%*2/12)	$72000
5	Discount on bond payable	$43200
6	Divided by number of month remaining 10years* 12 months per year=120 months. Less 2 months completed=20-2=118 months	118 months
7	Amortization of discount per month	$366
8	Amortization of discount for 4 months (June 1, 2020 to October 1, 2020)=$366*4	$1464
9	Cash Interest for 4 months (June 1, 2020 to Oct 1, 2020) ($4320000*10%*4/12)	$144000
10	Interest expense	$145464
11	Cash Interest paid ($4320000*10%*6/12)	$216000

Journal entry:

Date	Account Name	Debit	Credit
Oct 1, 2020	Interest Payable	$72000
	Interest expense	$145464
	Cash		$216000
	Discount on bond payable (amortization)		$1464
	(To record interest expense at Oct 1, 2020)

(B)

Particulars	Amount($)
Bond Converted	$1620000
Divided by issued bond price	$4320000
Percentage of bond redeemed on April 1, 2021	37.5%
No. of months bond held by bond holder (June 1, 2020 to April 1, 2021)=10 months
Discount on bond payable on bond redeemed ($1620000*10%)	$16200
Less: Amortized discount on bond payable ($16200*10/118)	$1373
Unamortized discount on bond payable ($16200-$1373)	$14827

Journal entry:

Date	Account Name	Debit	Credit
April 1, 2021	Bond Payable	$1620000
	Discount on bond payable		$14827
	Common stock (25000*$20)		$500000
	Paid in capital in excess of par value i.e., premium (Balancing figure)		$1105173
	(To record conversion of bonds into 25000 shares)