Question

Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1, 2017, at 98
plus accrued interest. The bonds were dated April 1, 2017, with interest payable April 1 and October 1. Bond discount is amortized
semiannually on a straight-line basis.
On April 1, 2018, $1,500,000 of these bonds were converted into 30,000 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, 2017. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)

b) Prepare the entry(ies) to record the conversion on April 1, 2018. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

answer(part a )

Interest expense(4,000,000 x10% x 4/12)+2712 136,045

Interest payable(4,000,000 x 10%x 2/12) 66,667

Discount on BP 2712

Cash 200,000

answer(part b)

Bond payable 1,500,000

Discount on BP 27,458

Common stock 600,000

paid in capital in excess of par 872,542

I already KNOW the answer because it is given in answer key, but why are we crediting discount on bond payable in part a? I know we are crediting the discount in part b because it is a conversion and we are trying to remove that discount but what about part a? why are we crediting the discount in part a when discount has normal debit balance? does that mean if it were a premium we would debit it in part a?

I already know the answer, and just want an explanation of why the discount on bond payable is a credit in part a, so i have a better understanding. I would also like to know if we would debit or credit for part a if it were a premium. please help and thanks in advance!

Answer 1