## Question

###### 10. On 1/2/YR1 XYZ issued 500, $1,000 face value bonds with a coupon rate of 5%,...

10. On 1/2/YR1 XYZ issued 500, $1,000 face value bonds with a coupon rate of 5%, pay interest semiannually, mature in ten years, and are convertible into 50 shares of its common stock. The bonds were issued for $1,100 each. The company will amortize any premium or discount using the straight-line method. The company's common equity was trading for $15/ share on 1/2/YR1. On 6/30/YR2, immediately after the third interest payment, 1 of the bonds were converted. The stock was trading for $30 on this day. Prepare the journal entry to record: a) The bond issue: b) The third interest payment. c) The conversion of of the bonds.

## Answers

a) The Bond Issue

1/2/Yr1 Bank A/c Dr 550,000 5% Convertible Bonds A/c Cr 500,000 Share Premium – Equity Conversion A/c Cr 50,000 (Being 500 5% convertible bonds issued at a 10% Premium) b) The third interest payment

6/30/Yr2 Interest Expense A/c Dr 100,000 Bank A/c Cr 100,000 (Being third interest payment is made on 6/30/Yr2 and interest expense accounted for) c)The conversion of half of the bonds

6/30/Yr2 5% Convertible Bonds A/c Dr 250,000 Share Premium – Equity Conversion A/c Dr 25,000 Loss on bond Conversion A/c Dr 100,000 Equity Share Capital A/c Cr 250,000 Paid-In Capital in Excess of Par A/c Cr 125,000 (Being 12,500 shares of face value 20 issued against convertible bonds)

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