Question

House Hardware Inc. issued 6% convertible bonds on January 1,2015, at 104. The bonds had a face value of $500,000 , pay interest semiannually on July 1 and January 1, and mature on January 1, 2025 .

Each $1,000 bond can be converted into 50 common shares at any time after January 1, 2017. House's CFO estimates that had the bonds not been convertible , they would have sold for only $375,378 (implies a yield of 10%). On July 2, 2018 , bondholders converted bonds with a face value of $300,000. House uses the effective interest method to compute interest and book value method to record conversion of convertible securities.

Required:

1) Prepare the journal entry to record the issue of the bonds on January 1, 2015.

2) Prepare the journal entry to record the interest payment on July 1, 2018.

3) Prepare the journal entry to record the conversion of bonds on July 2, 2018.

4) Assume that remaining bonds are not converted. Prepare any journal entries necessary on January 1, 2025 to record the extinguishment of the bonds.

Answer 1

1. Date 01-01-2015

Bank A/c Dr 500000

To 6% Convertible Bond A/c    500000

(being issue of bond)

2. Date 01-07-2018

Interest on Bond A/c Dr 15000

To Bank A/c 15000

(Being Payment of Interest)(Interest = 500000 x 6% x 0.5)

3. Date 02-07-2018

6% Convertible Bond A/c Dr 300000

To Shares A/c 300000

(Being Conversion of bond to shares)

4. Date 01-01-2025

Interest on Bond A/c Dr 6000

To Bank A/c 6000

(Being Payment of Interest)(Interest = 200000 x 6% x 0.5)

6% Convertible Bond A/c Dr 200000

To Bank A/c 200000

(Being payment made to bond holders on the date of meturity)