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Flounder Inc

Accounting

Flounder Inc. issued $3,780,000 of 11%, 10-year convertible bonds on June 1, 2017, at 98 plus accrued interest. The bonds were dated April 1, 2017, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2018, $1,417,500 of these bonds were converted into 33,000 shares of $22 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a)   Prepare the entry to record the interest expense at October 1, 2017. Assume that accrued interest payable was credited when the bonds were issued.
(B)  

Prepare the entry to record the conversion on April 1, 2018. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

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Answer:

A.

Journal entry to record the interest expense at October 1, 2017:

Interest payable(207,900 ×2/6) $69,300  
Interest Expense(207,900×4/6)+2,564 $141,164  
Discount on bonds payable   $2,564*
Cash(3780,000×11%/2)   $207,900

*Par value=$3,780,000

Issuance price(3780,000×.98)=$3,704,400

Total discount=$75,600

Months remaining=118

Discount per month(75,600/118)=$641

Discount amortized(4×641)=$2,564

B.

entry to record the conversion on April 1, 2018:

Bonds payable $1,417,500  
Discount on Bonds payable   $25,947*
Common stock   $726,000
Paid in capital in excess of Par(1417,500-726,000-25,947)   $665,553

*Discount related to converted bonds(75600×1,417,500/3,780,000)=$28,350

Less discount amortized {(28350/118)×10}=$2,403

Unamortized bond discount(28350-2403)=$25,947

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