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Flounder Inc
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. |
Expert Solution
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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