On January 1, 2016, Fowl Products issued $80 million of 6%, 10-year convertible

Question

On January 1, 2016, Fowl Products issued $80 million of 6%, 10-year convertible bonds at a net price of $83.05 million to yield 5.5%. Fowl recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Fowl’s $10 par common stock. Fowl records interest by the effective interest method.

On June 1, 2018, Fowl notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2018. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Fowl paid the semiannual interest and issued the requisite number of shares for the bonds being converted.

Required: 1. Prepare the journal entry for the issuance of the bonds by Fowl.

2. Prepare the journal entry for the June 30, 2016, interest payment.

3. Prepare the journal entries for the June 30, 2018, interest payment by Fowl and the conversion of the bonds (book value method). (Hint: You may want to prepare an amortization schedule to answer this).

Explanation / Answer

GENERAL JOURNAL                     Date Description Debit Credit 1. Prepare the journal entry for the issuance of the bonds by Fowl 2016 Jan. 1 Cash $830,50,000         Bonds Payable $800,00,000         Premium on Bonds Payable $30,50,000 2. Prepare the journal entry for the June 30, 2016, interest payment. June. 30 Interest Expense $22,83,875 Premium on Bonds Payable $1,16,125         Cash $24,00,000 3. Prepare the journal entries for the June 30, 2018, interest payment by Fowl and the conversion of the bonds (book value method). (Hint: You may want to prepare an amortization schedule to answer this). June. 30 Interest Expense $22,70,565 Premium on Bonds Payable $1,29,435         Cash $24,00,000 July. 1 Bonds Payable $800,00,000 Premium on Bonds Payable $24,36,550         Common Stock $242,40,000         Paid in capital in excess of par $565,60,000         Gain on conversion of Bonds $16,36,550 Amortization Table Date Interest Expense Interest Paid Premium amortized Unamortized premium Book Value Jan. 1 2016 3050000 83050000 June. 30 2016 2283875 2400000 116125 2933875 82933875 Dec. 31. 2016 2280682 2400000 119318 2814557 82814557 June. 30 2017 2277400 2400000 122600 2691957 82691957 Dec. 31. 2017 2274029 2400000 125971 2565986 82565986 June. 30 2018 2270565 2400000 129435 2436550 82436550

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