Question

(Show work and calculations)

On January 1, 2011, PQ Company received $452,000 upon issuance of $500,000 of callable, convertible, 8-year, 3% bonds, their interest payable semiannually on June 30 and December 31. Other information about the bonds is as follows:

• PQ has been using the straight-line method to amortize the $48,000 discount, having judged the difference under the effective-interest method to be immaterial.

• Each $1,000 bond is convertible into 50 shares of PQ’s $10 par value common stock, with any interest owed to converting bondholders payable upon their conversion.

• As of January 31, 2017, with PQ’s stock selling at $21 per share and its bonds trading at 97, the company decided to take the bonds off the market. Required—

Prepare the bond-related journal entry(s) PQ should have made on January 31, 2017, under each of the following independent assumptions:

Assumption #1: PQ retired all $500,000 of the bonds in an open market repurchase.

Assumption #2: PQ called the bonds and the holders presented all $500,000 of them for conversion.

Assumption #3: RS retired $200,000 of the bonds in an open market repurchase.

Assumption #4: RS called the bonds and the holders presented all $200,000 of them for conversion

Answer 1

Before moving to entries, lets prepare an amortization schedule to assist with journal entries

Date	Bonds Payable	Interest Payment	Discount Amortization	Bond Discount	Book Value of Bond
	(Face Value)	(Cash Account)		(Balance Amount)
		1.50%
01-Jan-11	500,000			48,000	452,000
30-Jun-11	500,000	7,500	3,000	45,000	455,000
30-Dec-11	500,000	7,500	3,000	42,000	458,000
30-Jun-12	500,000	7,500	3,000	39,000	461,000
30-Dec-12	500,000	7,500	3,000	36,000	464,000
30-Jun-13	500,000	7,500	3,000	33,000	467,000
30-Dec-13	500,000	7,500	3,000	30,000	470,000
30-Jun-14	500,000	7,500	3,000	27,000	473,000
30-Dec-14	500,000	7,500	3,000	24,000	476,000
30-Jun-15	500,000	7,500	3,000	21,000	479,000
30-Dec-15	500,000	7,500	3,000	18,000	482,000
30-Jun-16	500,000	7,500	3,000	15,000	485,000
30-Dec-16	500,000	7,500	3,000	12,000	488,000
30-Jun-17	500,000	7,500	3,000	9,000	491,000
30-Dec-17	500,000	7,500	3,000	6,000	494,000
31-Jan-17	500,000	1,250	500	5,500	494,500

Assumption1

Bonds Payable	Debit	500,000
Cash	Credit	485,000
Discount on Bonds Payable	Credit	5,500
Gain on retirement	Credit	9,500

Assumption 2

Bonds Payable	Debit	500,000
Loss on retirement	Debit	31,750
Common Stock	Credit	250,000
Discount on Bonds Payable	Credit	5,500
Additional Paid in Capital	Credit	275000
Interest Payable	Credit	1250

Assumption 3

Same entry as in Assumption 1. Just proportionate for 200,000

Bonds Payable	Debit	200,000
Cash	Credit	194,000
Discount on Bonds Payable	Credit	2,200
Gain on retirement	Credit	3,800

Assumption 4

Same entry as in Assumption 2. Just proportionate for 200,000

Bonds Payable	Debit	200,000
Loss on retirement	Debit	12,700
Common Stock	Credit	100,000
Discount on Bonds Payable	Credit	2,200
Additional Paid in Capital	Credit	110,000
Interest Payable	Credit	500