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
To prepare the necessary journal entries for the transactions described, follow these steps:
1. Sale of Convertible Bond on June 30, 2001:
First, calculate the total proceeds from the sale of the bond.
Proceeds = Face Value of Bond - Accrued Interest + Bond Issue Costs
Proceeds = $1,000,000 - $16,667 + $8,320
Proceeds = $991,653
Now, record the journal entry:
Date: June 30, 2001
Debit: Cash ($991,653)
Credit: Bonds Payable ($1,000,000)
Credit: Discount on Bonds Payable ($8,320)
Credit: Interest Payable ($16,667)
2. Accrued Interest on July 31, 2001:
To record the accrued interest for the period of July 1, 2001, to July 31, 2001:
Calculate the accrued interest by multiplying the face value of the bond by the interest rate and the timeframe.
Interest = $1,000,000 x 5% x 1/12
Interest = $4,167
Record the journal entry:
Date: July 31, 2001
Debit: Interest Expense ($4,167)
Credit: Interest Payable ($4,167)
3. Accrued Interest on August 31, 2001:
To record the accrued interest for the period of August 1, 2001, to August 31, 2001:
Calculate the accrued interest by multiplying the face value of the bond by the interest rate and the timeframe.
Interest = $1,000,000 x 5% x 1/12
Interest = $4,167
Record the journal entry:
Date: August 31, 2001
Debit: Interest Expense ($4,167)
Credit: Interest Payable ($4,167)
4. Payment of Interest on September 1, 2001:
To record the payment of interest on September 1, 2001:
Record the journal entry:
Date: September 1, 2001
Debit: Interest Payable ($8,333)
Credit: Cash ($8,333)
5. Conversion of Bonds on June 1, 2002:
To record the conversion of $20,000 of bonds into common stock:
First, calculate the book value of the converted bonds.
Book Value = Face Value - Discount + Unamortized Discount
Book Value = $20,000 - $8,320 + ($8,320 / 20 * 9)
Book Value = $20,000 - $8,320 + $3,984
Book Value = $15,664
Now, record the journal entry:
Date: June 1, 2002
Debit: Bonds Payable ($20,000)
Debit: Discount on Bonds Payable ($3,336)
Credit: Common Stock ($12,000)
Credit: Additional Paid-in Capital ($8,000)
Credit: Bond Interest Payable ($1,664)
6. Purchase of Non-Convertible Bonds on June 1, 2002:
To record the purchase of $20,000 of non-convertible bonds on the open market:
Record the journal entry:
Date: June 1, 2002
Debit: Bonds Payable ($20,000)
Credit: Cash ($12,000)
Credit: Discount on Bonds Payable ($8,000)
To support the bond payable discount, prepare an amortization schedule to track the monthly amortization of the bond discount. The schedule should show the discount amount being reduced each month until it is fully amortized by the bond's maturity date.