On January 1, 2018, Madison Products issued $41.5 million of 6%, 10-year convert

Question

On January 1, 2018, Madison Products issued $41.5 million of 6%, 10-year convertible bonds at a net price of $42.45 million. Madison recently issued similar, but nonconvertible, bonds at 98 (that is, 98% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison’s no par common stock. Madison records interest by the straight-line method. On June 1, 2020, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2020. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted. Required:

1. & 2. Prepare the journal entry for the issuance of the bonds by Madison and interest payment for the June 30, 2018. 3. Prepare the journal entries for the June 30, 2020, interest payment by Madison and the conversion of the bonds (book value method).

Explanation / Answer

Solution: 1&2. Event General Journal Debit Credit 1. Cash 42,450,000 Convertible bonds payable 40,670,000 Equity -conversion option 1,780,000 Working Notes: Convertible bonds payable = Face value x 98% [98% as recently bond issued at 98%, that suggest only bond they can issued at 98%] =$41,500,000 x 98% =$40,670,000 Equity -conversion option = Issued value - Convertible bonds payable =$42,450,000 -40,670,000 =$1,780,000 Cash = issued value = $42,450,000 Event General Journal Debit Credit 2. Interest expense 1,286,500 Convertible bonds payable 41,500 Cash 1,245,000 Working Notes: Cash = amount paid as coupon = face value x (6%/2) =$41,500,000 x 3% =$1,245,000 Convertible bonds payable = discount /no. of coupon = (face value - Convertible bonds payable)/(10 x 2) =(41,500,000 - 40,670,000)/20 =830,000/20 =$41,500        amortization of discount Interest expense = coupon + amortization of discount =$1,245,000 + $41,500 =$1,286,500 3. Event General Journal Debit Credit 1. Interest expense 1,286,500 Convertible bonds payable 41,500 Cash 1,245,000 Working Notes: Cash = amount paid as coupon = face value x (6%/2) =$41,500,000 x 3% =$1,245,000 Convertible bonds payable = discount /no. of coupon = (face value - Convertible bonds payable)/(10 x 2) =(41,500,000 - 40,670,000)/20 =830,000/20 =$41,500        amortization of discount Interest expense = coupon + amortization of discount =$1,245,000 + $41,500 =$1,286,500 Event General Journal Debit Credit 2. Convertible bonds payable 40,877,500 Equity—conversion option 1,780,000 Common stock 42,657,500 Working Notes: Convertible bonds payable book value At initial point 40,670,000 + Amortized till June 30, 2020 207,500 5 coupons [5 x 41,500 ] Convertible bonds payable at conversion 40,877,500 Equity—conversion option 1,780,000 from 1st entry Common stock = [ Equity—conversion option + Convertible bonds payable ] =$1,780,000 + 40,877,500 =$42,657,500 Please feel free to ask if anything about above solution in comment section of the question.

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