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1. On February 1, 2016, Ellison Co. issued eight-year bonds with a face value of

ID: 2540773 • Letter: 1

Question

1. On February 1, 2016, Ellison Co. issued eight-year bonds with a face value of $10,000,000 and a stated interest rate of 8%, payable semiannually on July 1 and January The bonds were sold to yield 10%.

     

a) The issue price of the bonds is

b) Record the journal entries for February 2016 at issuance and July 1          

2. Using the information above, assume that the bonds issued by Ellison Co. are convertible with each $1,000 convertible into 25 shares of common stock.    Assume that Ellison converts $4,000,000 of bonds on July 1, 2018 into common stock. Prepare the following entries:

a. Entry at February 1, 2016 for issuance of the convertible bonds

b. Entry at July 1, 2018 for the conversion of $4,000,000 of bonds.

Explanation / Answer

a. Issue price of Bond is 10,000,000 [(10000000*PV 10/2=5% 8*2=16 payment)+(Interest 500000*PVAF PV 10/2=5% 8*2=16 payment)]

bFeb 16. Cash Account Debit 10 Million

Bond Payable Credit 10 Million

July 1: Interest Expense Debit 10million*8%*5month/12=333333

Interest payable Credit

2. Issuance:

Cash Account Debit 10 m

Bond Payable Credit 10 m

July 1:

Bond Payable Debit 4000000

Preferred Stock Credit (4000*25) 4000000 (Assuming 40 par value)