On January 1, 2018, Madison Products issued $41.7 million of 6%, 10-year convert

Question

On January 1, 2018, Madison Products issued $41.7 million of 6%, 10-year convertible bonds at a net price of $42.67 million. Madison 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 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

Part-1: Journal Entry Date Account Titles Debit Credit 01 Jan 2018 Cash $42,670,000 Convertible Bond Payable $41,700,000 Premium on Bond payable ($42.67-$41.7 Million) $970,000 ( To record Issuance of Convertible bond at premium) Part-2: Journal Entry Date Account Titles Debit Credit 30June 2018 Interest Expense $1,202,500.00 Premium on Bond Payable ( $970000/20) $48,500.00 Cash ($41,700,000*3%) $1,251,000.00 To Record Interest Payment Part-3 Journal Entry Date Account Titles Debit Credit 30June 2020 Interest Expense $1,202,500.00 Premium on Bond Payable ( $970000/20) $48,500.00 Cash ($41,700,000*3%) $1,251,000.00 To Record Interest Payment Convertible Bond Payable $41,700,000 Premium on Bonds Payable ( $970000-$48500*5) $727,500 Common Stock ( $41700000+$727500) $42,427,500 (To record Conversion of Bond)

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