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Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1, 2020, at 98 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, $1,500,000 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. Instructions 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. (Round to nearest dollar.) b. Prepare the entry(ies) 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.

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jepessoa

Answer:

i will first record the issuance of the bonds:

June 1, 2020, bonds issued at a discount + accrued interests

Dr Cash 3,986,667

Dr Discount on bonds payable 78,667

Dr Interest expense 1,333

    Cr Bonds payable 4,000,000

    Cr Interest payable 66,667

Accrued interests = $4,000,000 x 10% x 2/12 = $66,667

bond discount = $4,000,000 x 2% = $80,000

amortization per coupon payment = $80,000 / 20 = $4,000

allocated amortization to this issuance = $4,000 x 2/6 = $1,333

a) October 1, 2020, first coupon payment

Dr Interest expense 130,666

Dr Interest payable 66,667

    Cr Cash 200,000

    Cr Discount on bonds payable 2,667

b) I will first record the second coupon payment

Dr Interest expense 204,000

    Cr Cash 200,000

    Cr Discount on bonds payable 4,000

the carrying value of the bonds = $3,928,000, which represents 98.2% of face value

$1,500,000 x 98.2% = $1,473,000

discount on bonds payable = $1,500,000 - $1,473,000 = $27,000

April 1, 2021, $1,500,000 converted into 30,000 stocks

Dr Bonds payable 1,500,000

    Cr Common stock 600,000

    Cr Additional paid in capital 873,000

    Cr Discount on bonds payable 27,000

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