On January 1, 2018, Gless Textiles issued $12 million of 9%, 10-year convertible

Question

On January 1, 2018, Gless Textiles issued $12 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31 Each $1,000 bond is convertible into 40 shares of Gless's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99 (that is, 99% of face amount). Century Services purchased 10% of the issue as an investment Required 1. Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond investment by Century 2. Prepare the journal entries for the June 30, 2022, interest payment by both Gless and Century assuming both use the straight-line method 3. On July 1, 2023, when Gless's common stock had a market price of $33 per share, Century converted the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method). Complete this question by entering your answers in the tabs below entries for the issuance of the bonds by Gless and the purchase of the bond investment by Century. (If no Prepare the journal entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Explanation / Answer

Part 1 Date General Journal Debit Credit Gless (Issuer) January 1, 2018 Cash (101% x $12 million) 12,120,000 Convertible bonds payable (face amount) 12,000,000 Premium on bonds payable (difference) 120,000 Century (Investor) Investment in convertible bonds (10% x $12 million) 1,200,000 Premium on bond investment (difference) 12,000 Cash (101% x $1.2 million) 1,212,000 Part 2 June 30, 2022 Gless (Issuer) Interest expense ($540,000 – 6,000) 534,000 Premium on bonds payable ($120,000 ÷ 20) 6,000 Cash (4.5% x $12,000,000) 540,000 Century (Investor) Cash (4.5% x $1,200,000) 54,000 Premium on bond investment ($12,000 ÷ 20) 600 Interest revenue ($54,000 – 600) 53,400 [Using the straight-line method, each interest entry is the same.] Part 3 July 1, 2023 Gless (Issuer) Convertible bonds payable (10% of the account balance) 1,200,000 Premium on bonds payable (($120,000 – [$6,000 x 11]) x 10%) 5,400 Common stock (to balance) 1,205,400 Century (Investor) Investment in common stock 1,205,400 Investment in convertible bonds (account balance) 1,200,000 Premium on bond investment ($12,000 – [$600 x 11]) 5,400

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