Issuance of Convertible Bonds Joy Insurance decides to finance expansion of its
ID: 2556204 • Letter: I
Question
Issuance of Convertible Bonds
Joy Insurance decides to finance expansion of its physical facilities by issuing convertible debenture bonds. The terms of the bonds follow: maturity date 10 years after May 1, 20Y1, the date of issuance; conversion at option of holder after two years; 20 shares of $1 par value stock for each $1,000 bond held; interest rate of 12% and call provision on the bonds of 102. The bonds were sold at 101.
1. Give the entry on Joy's books to record the sale of $900,000 of bonds on July 1, 20Y1; interest payment dates are May 1 and November 1. Assume the sale of the bonds is to be recorded in a manner that will recognize a value related to the conversion feature. The estimated sales price of the bonds without the conversion feature is 98.
July 1
Cash $$
Discounts on Bonds Payable $$
Bonds Payable $$
Paid-in Capital Arising from Bond Conversion Feature $$
Interest Payable $$
July 1
Cash $$
Discounts on Bonds Payable $$
Bonds Payable $$
Paid-in Capital Arising from Bond Conversion Feature $$
Interest Payable $$
Explanation / Answer
Face Value of one Bond = 100
Total Number of Bond issued = 900,000/100 = 9,000
.Number of Shares = 900,000/1000*20 = 18,000 shares.
Bond Interest for two months = 900,000*12%/12*2 = 18,000
Bond Issue Price = 101 + 18,000/9000 = 103
Total Issue Price = 900,000*103 = 927,000
Please refer below journal entry
Cash Debit $927,000 Discount on Bonds Payable Debit (100-98)*9000 $18,000 Bond Payable Credit $900,000 Interest Payable (900,000*12%/12*2) credit $18,000 Paid-in Capital Arising from Bond Conversion Feature Credit $27,000Related Questions
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