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Chapter 16: Q2P (page 882)

EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued \(2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was \)54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.鈥檚 \(100 par value common stock for each \)1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following

dates. (Round to the nearest dollar.)

(a) August 1, 2018. (Assume the book value method is used.)

(b) August 31, 2018.

(c) December 31, 2018, including closing entries for end-of-year.

Short Answer

Expert verified

The amount transferred to income summary account at the end of the year is $292,675.

Step by step solution

01

Being the entry for the conversion

Date

Particulars

Debit

Credit

August 1, 2018

Bonds Payable

$250,000

Discount on Bonds Payable

$4,815

Common Stock

$200,000

Paid in Capital

$45,185

(Being entry for conversion)

August 1, 2018

Interest Payable

$2,500

Cash

$2,500

(Being entry for the interest payable)

02

Entry for interest payable

Date

Particulars

Debit

Credit

August 31, 2018

Interest Expense

$405

Discount on bonds payable

$405

(Being entry for the interest Expense)

August 31, 2018

Interest Expense

$22,500

Interest Payable

$22,500

(Being adjustment entry for interest expense)

03

Closing entry

Date

Particulars

Debit

Credit

December 31, 2018

Income Summary

$292,675

Interest Expense

$292,675

(Being closing entry at the end of the year))

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Most popular questions from this chapter

On January 1, 2017, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share ofBarwood鈥檚 \(5 par value common stock at \)50 per share at any time during the next 5 years. The market price of the stock is \(65 per share on the date of grant. The fair value of the options at the grant date is \)150,000. The period of benefit is 2 years. Prepare Barwood鈥檚 journal entries for January 1, 2017, and December 31, 2017 and 2018.

(Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2017. The stock has a fair value of \(500,000 on this date. The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with the company until December 31, 2021. The par value of the stock is \)10. At December31, 2017, the fair value of the stock is $450,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On July 25, 2021, Tokar leaves the company. Prepare the journal entry (if any) to account for this forfeiture

(Conversion of Bonds) The December 31, 2017, balance sheet of Kepler Corp. is as follows.10% callable, convertible bonds payable (semiannual interest dates April 30 and October 31; convertible into 6 shares of \(25 par value common stock per \)1,000 of bond principal; maturity date April 30, 2023) \(500,000Discount on bonds payable 10,240 \)489,760On March 5, 2018, Kepler Corp. called all of the bonds as of April 30 for the principal plus interest through April 30. By April 30, all bondholders had exercised their conversion to common stock as of the interest payment date. Consequently, on April 30, Kepler Corp. paid the semiannual interest and issued shares of common stock for the bonds. The discount is amortized on a straight-line basis. Kepler uses book value method.

Prepare the entry(the ies) to record the interest expense and conversion on April 30, 2018. Reversing entries were made on January 1, 2018. (Round to the nearest dollar.)

Rockland Corporation earned net income of \(300,000 in 2017 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was \)800,000 of 9% bonds, which are convertible into 16,000 shares of common. Rockland鈥檚 tax rate is 40%. Compute Rockland鈥檚 2017 diluted earnings per share.

Discuss the similarities and the differences between convertible debt and debt issued with stock warrants.
See all solutions

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