1. On February 1, 2016, Ellison Co. issued eight-year bonds with a face value of
ID: 2540773 • 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 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
a. Issue price of Bond is 10,000,000 [(10000000*PV 10/2=5% 8*2=16 payment)+(Interest 500000*PVAF PV 10/2=5% 8*2=16 payment)]
bFeb 16. Cash Account Debit 10 Million
Bond Payable Credit 10 Million
July 1: Interest Expense Debit 10million*8%*5month/12=333333
Interest payable Credit
2. Issuance:
Cash Account Debit 10 m
Bond Payable Credit 10 m
July 1:
Bond Payable Debit 4000000
Preferred Stock Credit (4000*25) 4000000 (Assuming 40 par value)
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