On January 1, 2013, Madison Products issued $40 million of 6%, 10-year convertib
ID: 2488912 • Letter: O
Question
On January 1, 2013, Madison Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.4 million. Madison recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison’s no par common stock. Madison records interest by the straight-line method.
On June 1, 2015, Madison notified bondholders of its intent to call the bonds at face value plus a 2% call premium on July 1, 2015. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted.
Prepare the journal entry for the issuance of the bonds by Madison. (Enter your answers in whole dollars. If no entry is required for an event, select "No journal entry required" in the first account field.)
Record the issuance of the bonds by Madison.
Prepare the journal entry for the June 30, 2013, interest payment.
Prepare the journal entries for the June 30, 2015, interest payment by Madison and the conversion of the bonds (book value method). (Enter your answers in whole dollars. If no entry is required for a particular event, select "No journal entry required" in the first account field.)
On June 1, 2015, Madison notified bondholders of its intent to call the bonds at face value plus a 2% call premium on July 1, 2015. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted.
Explanation / Answer
1. Entry for Issue of Convertible Bonds
Bank Account Dr. 40,400,000
To 6% 10 year Convertible Bonds 40,000,000
To Premium on Bonds Payable 400,000
2. Entry for Interest Payment
Interest Expense Dr. 1,200,000
To Bank Account 1,200,000
3. Entry for Interest Payment
Interest Expense Dr. 1,200,000
To Bank Account 1,200,000
Entry for Conversion (Book Value Method)
6% 10 year Convertible Bonds Dr. 40,000,000
Premium on Bonds Payable Dr. 400,000
To Common Stock 40,400,000
Entry for Call Option - No entry required
While making an entry for conversion, it has been asusmed that the FV of Rs. 99 is on the date of borrowing and not on the date of the conversion.
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