On January 1, Year 1, Acorn Financial Corp. issued 850 convertible bonds. Each $

Question

On January 1, Year 1, Acorn Financial Corp. issued 850 convertible bonds. Each $1,000 face value bond is convertible into 5 shares of common stock. The bonds have a 10 year term to maturity and pay interest semiannually. Acorn's common stock has a par value of $20.00 per share. The bonds have a stated interest rate of 4% and pay interest semiannually. The convertible bonds were sold for $875,500. Bond issue costs of $50,000 will be subtracted from the bond sale proceeds to be received by Acorn. The bonds were sold to yield a market interest rate of 3%. Acorn will use the effective interest method to amortize the bond discount and/or premium. Round all amounts to the nearest dollar.
1.Record the journal entry for the issuance of the convertible bonds on January 1, Year 1.

2.Record the journal entries on June 30, Year 1 to recognize interest expense and the amortization of the bond issue cost for the first six months of Year

Explanation / Answer

A B C D E F G               $ Date Interest Payment @2% Interest expenses at 1.5%*G Amortization of Note C-B cr, balance in the a/c Bond Premiun a/c Credit balance in the Bond payable Carrying value of Note F-E Credit cash Debit Interest Expense Debit Bond premium Jan,1 2014 25500 850000 875500 June 30,2014 17000 13133 -3868 21633 850000 871633 Dec,31 2014 17000 13074 -3926 17707 850000 867707 June 30,2015 17000 13016 -3984 13723 850000 863723 Dec,31 2015 17000 12956 -4044 9678 850000 859678 June 30,2016 17000 12895 -4105 5574 850000 855574 Dec,31 2016 17000 12834 -4166 1407 850000 851407 June 30,2017 17000 12771 -1407 0 850000 850000 Total 119000 90678 -25500 69721 Premium is amortized in 3.5 years than the cr balance in bond premium a,c becomes nil

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