1. On February 1, 2016, Ellison Co. issued eight-year bonds with a face value of
ID: 2538503 • Letter: 1
Question
1. On February 1, 2016, Ellison Co. issued eight-year bonds with a face value of $10,000,000 and a stated interest rate of 8%, payable semiannually on July 1 and January 1 . The bonds were sold to yield 10 a. The issue price of the bonds is b. Record the journal entries for February 2016 at issuance and July 1 2. Using the information above, assume that the bonds issued by Ellison Co. are convertible with each $1,000 convertible into 25 shares of common stock. Assume that Ellison converts $4,000,000 of bonds on July 1, 2018 into common stock. Prepare the following entries a. Entry at February 1, 2016 for issuance of the convertible bonds b. Entry at July 1, 2018 for the conversion of $4,000,000 of bonds.Explanation / Answer
Part 1:
Semi-annual period
Semi-annual interest plus principal
Present value factor @5% pa.
Present value of cash outflow
1
400000
0.952381
380952.4
2
400000
0.907029
362811.8
3
400000
0.863838
345535
4
400000
0.822702
329081
5
400000
0.783526
313410.5
6
400000
0.746215
298486.2
7
400000
0.710681
284272.5
8
400000
0.676839
270735.7
9
400000
0.644609
257843.6
10
400000
0.613913
245565.3
11
400000
0.584679
233871.7
12
400000
0.556837
222735
13
400000
0.530321
212128.5
14
400000
0.505068
202027.2
15
400000
0.481017
192406.8
16
10400000
0.458112
4764360
The issue price of the bond
8916223
Note:
Date
Accounts and explanation
Debit ($)
Credit ($)
01.02.2016
Bank
10000000
8% Bond
8916223
Discount on issue of bond
1083777
(Being the bond issued)
01.07.2016
Interest
400000
Bank
400000
(Being coupon interest is paid)
Profit and loss account
400000
Interest
400000
(Being interest expenditure recognized in profit and loss account)
Part 2:
Date
Accounts and explanation
Debit ($)
Credit ($)
01.02.2016
Bank
10000000
8% Convertible Bond
10000000
(Being the bond issued)
01.07.2016
8% convertible bond
4000000
Common stock
4000000
(Being the 8% convertible bond converted)
Semi-annual period
Semi-annual interest plus principal
Present value factor @5% pa.
Present value of cash outflow
1
400000
0.952381
380952.4
2
400000
0.907029
362811.8
3
400000
0.863838
345535
4
400000
0.822702
329081
5
400000
0.783526
313410.5
6
400000
0.746215
298486.2
7
400000
0.710681
284272.5
8
400000
0.676839
270735.7
9
400000
0.644609
257843.6
10
400000
0.613913
245565.3
11
400000
0.584679
233871.7
12
400000
0.556837
222735
13
400000
0.530321
212128.5
14
400000
0.505068
202027.2
15
400000
0.481017
192406.8
16
10400000
0.458112
4764360
The issue price of the bond
8916223
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