Aubrey Inc. issued $3,610,800 of 9%, 10-year convertible bonds on June 1, 2014,
ID: 2720105 • Letter: A
Question
Aubrey Inc. issued $3,610,800 of 9%, 10-year convertible bonds on June 1, 2014, at 98 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, $1,354,050 of these bonds were converted into 38,300 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.
Explanation / Answer
(a) Interest Payable ($162,486 X 2/6) $54,162
Interest Expense ($162,486 X 4/6) + $2,448 $108,324
Discount on Bonds Payable $2,448
Cash ($3,610,800 X 9% ÷ 2) $162,486
Calculations:
Par value $3,610,800
Issuance price $3,538,584 (98% of Par Value)
Total discount $72,216
Months remaining 118
Discount per month $612
($72,216 ÷ 118)
Discount amortized $2,448
(4 X $612)
(b) Bonds Payable $1,354,050
Discount on Bonds Payable $24,786
Common Stock (38,300 X $17) $651,100
Paid-in Capital in Excess of Par $678,164
($1,354,050– $24,786 – $651,100 = $678,164)
Calculations:
Discount related to 3/8 of
the bonds ($72,216 X 3/8) $27,081
Less discount amortized [($27,081 ÷ 118) X 10] $2,295
Unamortized bond discount $24,786
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