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Schuss Inc
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.)
Expert Solution
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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