On January 1, 2013, Schmidt Security issued $60 million of 9%, 10-year convertib

Question

On January 1, 2013, Schmidt Security issued $60 million of 9%, 10-year convertible bonds at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Schmidt's $1 par common stock. Facial Mapping Company purchased 10% of the issue as an investment.

Required:

1. Prepare the journal entries for the issuance of the bonds by Schmidt and the purchase of the bond investment by Facial Mapping.

2. Prepare the journal entries for the June 30, 2015, interest payment by both Schmidt and Facial Mapping assuming both use the straight-line method.

3. On July 1, 2016, when Schmidt’s common stock had a market price of $33 per share, Facial Mapping converted the bonds it held. Prepare the journal entries by both Schmidt and Facial Mapping for the conversion of the bonds (book value method).  

Explanation / Answer

Bond Face Value                60,000,000 Issue price @102%=                61,200,000 Bond Premium                   1,200,000 Bond duration 10 Year Premium Amortization semi annually by SL method                         60,000 Semi Annual Interest Payable @4.5%=                   2,700,000 Facial Mapping purchase value @10%=                   6,120,000 Journal Entry Issue and Purchase Schimdt Book Date Account Title Dr $ Cr$ Jan 1.2013. Cash                61,200,000 Bond Payable          60,000,000 Premium on Bond Payable            1,200,000 Facial Mapping Book Date Account Title Dr $ Cr$ Jan 1.2013. Investment in Bond                   6,120,000 Cash            6,120,000                           -   Interest Paymeny Schimdt Book Date Account Title Dr $ Cr$ Jun 30.2015. Interest Payable              2,700,000 Interest Expense                   2,640,000 Premium on Bond Payable                         60,000 Jun 30.2015. Interest Payable                     2,700,000 Cash            2,700,000 Facial Mapping Book Date Account Title Dr $ Cr$ Jun 30.2015. Interest Income                270,000 Cash                      270,000 Convesrsion of Bond   Date of conversion =Jul 1.2016. 7 installments paid by then Premium Amortized =                      420,000 Remaining Premium unamortized=                      780,000 Carrying Value of Bond=                60,780,000 Convesrsion done for 10% Bond Face value converted=                   6,000,000 Unamortized Premium converted=                         78,000 Total Shares issued =6000000/1000*40=                      240,000 Share par value $1 Schimdt Book Date Account Title Dr $ Cr$ Jul 1.2016. Bond Payable                   6,000,000 Premium on Bond Payable                         78,000 Common Stock                240,000 Paid in Capital In Excess of Par              5,838,000 Schimdt Book Date Account Title Dr $ Cr$ Jul 1.2016. Investment in Bond            6,120,000 Investment in Common Stock                     7,920,000 Gain on Conversion of Investment in Bond            1,800,000

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