Prepare all the necessary journal entries to record the following transactions:
1. Sale of a 20 year convertible bond (dated March 1, 2001) with a face value of $1,000,000, interest rate 5%. The bonds were sold 4 months later on June 30, 2001 at 98 plus accrued interest of $16,667 ($1,000,000 x 5% x 4/12). Brokers fees and other bond issue costs such as printing and legal fees totaled $8,320. Interest is paid semi-annually March 1 and September 1: Record the journal entries for the following dates: June 30, 2001; July 31, 2001; August 31, 2001; September 1, 2001.
2. On June 1, 2002 (11 months after the bonds were issued), 2% or $20,000 of the bonds in item 1 above are converted to 120 shares of $100 par value common stock. Prepare the journal entries to record the conversion on June 1, 2002. (Use book value method).
3. Additional newfacts:
On June 1, 2002, a company purchased on the open market $20,000 of a company’s non-convertible (or convertible) bonds (2% of $1,000,000 bonds outstanding) at a price of “60” ($12,000 cash) plus accrued interest. The purchase or sale of non-convertible bonds with detachable stock purchase warrants follows the following rule: the market value of detachable warrants must be shown separately – to compute gain or loss. Thus, bonds issued with non-detachable stock purchase warrants would show the “difference’ from “carrying value” as an “extraordinary gain or loss.” Prepare the journal entries to record the purchase on the open market on June 1, 2002. Show support for the bond payable discount by preparing an amortization schedule
Intermediate Accounting - SraJMcGin, Saturday, December 11, 2010 at 9:33am
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