Aubrey Inc. issued $5,345,400 of 9%, 10-year convertible bonds on June 1, 2014,

Question

Aubrey Inc. issued $5,345,400 of 9%, 10-year convertible bonds on June 1, 2014, at 99 plus accrued interest. The bonds were dated April 1, 2014, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight- line basis. On April 1, 2015, $2,004,525 of these bonds were converted into 30,200 shares of $17 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, 2014. Assume that accrued interest payable was credited when the bonds were issued. (b) Prepare the entry to record the conversion on April 1, 2015. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry s required, select ''No Entry'' for the account titles and enter O for the amounts. Round answers to 0 decimal places, e.g. $3,500.)

Explanation / Answer

A) Journal entry

discount = $5345,400 @1% =$53,454

interest for six month $5345,400 @ 9% *1/2   = $240543

Amortisation on bonds discount = $53,454 /118 * 4 = $1812

B) On date of conversion

Discount related to .375 of the bonds

(53,454 * .375)                      = $20,045

Less: discount amortises

($20,045 /118 *10)              =       1,698

Total                                   = $18,347

Date Description Debit Credit interest payable $80,181 Oct 1 ,2014 Interest expense $162,174 Discount on bonds payable $1812 Cash $240,543

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