Question

On January 1, 2018, Madison Products issued $41.5 million of 6%, 10-year convertible bonds at a net price of $42.45 million. Madison recently issued similar, but nonconvertible, bonds at 98 (that is, 98% 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

Required 1 :
Date	General Journal	Debit	Credit
January 01 ,2018	Cash	$ 42,450,000
	Convertible Bonds Payable		$ 41,500,000
	Premium on Bonds Payable (42,450,000-41,500,000)		$ 950,000
	(To record Issuance of Bonds by Madison )
Required 2 :
Date	General Journal	Debit	Credit
June 30,2018	Interest Expense ($1,245,000 -$ 47,500)	$ 1,197,500
	Premium on Bonds Payable (950,000 / 20 Payments )	$ 47,500
	Cash ($41,500,000*6%*6/12 Months )		$ 1,245,000
	(To record Interest Payment for the June 30,2018 )
Required 3 :
Date	General Journal	Debit	Credit
June 30,2020	Interest Expense ($1,245,000 -$ 47,500)	$ 1,197,500
	Premium on Bonds Payable (950,000 / 20 Payments )	$ 47,500
	Cash ($41,500,000*6%*6/12 Months )		$ 1,245,000
	(To record Interest Payment for the June 30,2020 )
June 30,2020	Convertible Bonds Payable	$ 41,500,000
	Premium on Bonds Payable ($ 950,000 -($47,500*5 Payments )	$ 712,500
	Common Stock ($41,500,000+$712,500)		$ 42,212,500
	(To record Conversion of Bonds into Common Stock )