On January 1, 2014, Gottlieb Corporation issued $4,280,000 of 10-year, 9% conver

Question

On January 1, 2014, Gottlieb Corporation issued $4,280,000 of 10-year, 9% convertible debentures at 104. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into 9 shares of Gottlieb Corporation $103 par value common stock after December 31, 2015.

On January 1, 2016, $428,000 of debentures are converted into common stock, which is then selling at $114. An additional $428,000 of debentures are converted on March 31, 2016. The market price of the common stock is then $119. Accrued interest at March 31 will be paid on the next interest date.

Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2015. (c) March 31, 2016. (b) January 1, 2016. (d) June 30, 2016.

Explanation / Answer

Answer

Working

December 31 2015

Bonds Premium = $ 4,280,000*(104-100)% = 171200

Bond Interest paid each semi annual period = 4,280,000*9%*1/2 = 192600

Semi Annual Amortisation of Bonds Premium = 171200/(10*2) = 8560

Interest Expense = 192600-8560

January 1 2016

Bond premium unamortised till date on 428000 debenture = 428000*4% - 428000*4%/20 *4 = 13696

March 31, 2016.

Interest on additional $428,000 till Marchb 31 2016 Payable = 428000*9%*3/12 = 9630

Bond premium amortisation on 428000 = 428000*4%/20 * 3/6 = 428

Bond premium unamortised till date = 428000*4% - 428000*4%/20 *(4 + 3/6) = 13268

June 30, 2016.

outstanding debenture = (4,280,000-428000-428000) = 3424000

Bonds Premium on outstanding debenture = $ 3424000*(104-100)% = 136960

Bond Interest paid each semi annual period = 3424000*9%*1/2 = 154080

Semi Annual Amortisation of Bonds Premium = 136960/(10*2) = 6848

Interest Expense = 154080-6848 = 147232

Date Account Title & Explaination Debit Credit December 31, 2015. Bonds Premium 8560 Interest Expenses 184040 Cash 192600 January 1, 2016 Bonds Payable 428000 Bonds Premium 13696 Gain on Bond Conversion 2568 Common Stock (428000/1000* 9 *103) 396756 Additional Paid in capital (428000/1000* 9 *(114-103)) 42372 March 31, 2016 Bonds Premium 428 Interest Expenses 9202 Interest Payable 9630 March 31, 2016 Bonds Payable 428000 Bonds Premium 13268 Loss on Bond Conversion 17120 Common Stock (428000/1000* 9 *103) 396756 Additional Paid in capital (428000/1000* 9 *(119-103)) 61632 June 30, 2016 Bonds Premium 6848 Interest Expenses 147232 Interest Payable 9630 Cash 163710

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