Volker Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2012. The
ID: 2348284 • Letter: V
Question
Volker Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2012. The bonds provide for 12% interest payable semiannually on Jan 1 and July 1. The discount in connection with the issue was $54,000, which is being amortized monthly on a straight-line basis.The bonds are convertible after one year into 8 shares of Volker Inc.'s $100 par value common stock for each $1000 of bonds.
On August 1, 2013, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.
Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (round to the nearest dollar)
A. August 1, 2013 (assume book value method is used
B. August 31, 2013
C. December 31, 2013, including closing entries for end-of-year
The attatchment the prof gave us also has tables ot fill in.
1. Unamortized discount on bonds payable and it starts with Amount to be amortized over 120 months
2. Amortization of bond discount charged to bond interest expense in 2013 would be as follows
3. Interest on Bonds:
4.Interest for 2013 would be as follows:
5.Total interest
Explanation / Answer
(a) Entries at August 1, 2013
Bonds Payable..................................250,000
Discount on Bonds Payable (Schedule 1).................4,815
Common Stock (8 X 250 X $100).........................200,000
Paid-in Capital in Excess of Par..........................45,185
($54,000 X 1/10) X (107/120) = 4,815
($250,000 – $4,815) – $200,000 = 45,185
Interest Payable.....................................2,500
Cash ($250,000 X 12% X 1/12)..................... 2,500
(b) Entries at August 31, 2013
Bond Interest Expense............................405
Discount on Bonds Payable (Schedule 1)............405
($54,000 X 90%) X (1/120) = 405
Bond Interest Expense.............................22,500
Interest Payable ($2,250,000 X 12% X 1/12)........22,500
(c) Entries at December 31, 2013
(Same as August 31, 2013, and the following closing entry)
Income Summary...................................292,675
Bond Interest Expense (schedule 2).................292,675
Schedule 1
Monthly Amortization Schedule
Unamortized discount on bonds payable:
Amount to be amortized over 120 months.................................$54,000
Amount of monthly amortization ($54,000 ÷ 120).........................$450
Amortization for 13 months to July 31, 2011 ($450 X 13)................$5,850
Balance unamortized 7/31/11 ($54,000 – $5,850)....................... $48,150
10% applicable to debentures converted....................................4,815
Balance August 1, 2011..................................................... $43,335
Remaining monthly amortization over remaining 107 months..........$405
Schedule 2
Interest Expense Schedule
Amortization of bond discount charged to bond interest expense in 2011 would be as follows:
7 months X $450....................................................... $3,150
5 months X $405....................................................... 2,025
Total.............................................................$5,175
Interest on Bonds:
12% on $2,500,000.....................................................$300,000
Amount per month ($300,000 ÷ 12)..................................$25,000
12% on $2,250,000.................................................... $270,000
Amount per month ($270,000 ÷ 12)................................. $22,500
Interest for 2011 would be as follows:
7 months X $25,000.......................................... $175,000
5 months X $22,500...........................................112,500
Total....................................................$287,500
Total interest
Amortization of discount.......................................$5,175
Cash interest paid..............................................287,500
Bond interest expense.........................................$292,675
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