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Homework answers / question archive / Schuss Inc

Schuss Inc

Accounting

Schuss Inc. issued euro 3,000,000 of 10%, 10-year convertible bonds on April 1, 2015, at 98. The bonds were dated April 1, 2015, with interest payable April 1 and October 1. Bond discount is amortized semiannually using the effective-interest method. The net present value of the bonds without the conversion feature discounted at 12% (its market rate) was euro 2, 655, 888. On April 1, 2016, euro 1,000,000 of these bonds were converted into 30,000 shares of euro 20 par value ordinary shares. Accrued interest was paid in cash at the time of conversion.

Instructions

(a) Prepare the entry to record the issuance of the convertible bond on April 1, 2015.

(b) Prepare the entry to record the interest expense at October 1, 2015.

(c) Prepare the entry(ies) to record the conversion on April 1, 2016. (The book value method is used.)

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Solution:

(a)   Cash (€3,000,000 X .98)............................................    2,940,000

               Bonds Payable...................................................                       2,655,888

               Share Premium—Conversion Equity.............                          284,112

(b)   Interest Expense (€2,655,888 X 12% ÷ 2)..............       159,353

               Bonds Payable...................................................                              9,353

               Cash (€3,000,000 X 10% ÷ 2)............................                          150,000

(c)   Interest Expense ([€2,655,888 + €9,353]
                  X 12% ÷ 2).........................................................       159,914

               Bonds Payable...................................................                              9,914

               Cash......................................................................                          150,000

Share Premium—Conversion Equity

           (284,112 X 1/3)......................................................          94,704

        Bonds Payable........................................................        891,718*

                Share Capital—Ordinary (30,000 X €20).....                           600,000

                Share Premium—Ordinary............................                           386,422

        *(€2,655,888 + €9,353 + €9,914) X 1/3

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