Question

For each of the unrelated transactions described below, present the entries required to record each transaction.

1. Grand Corp. issued $20,225,000 par value 10% convertible bonds at 97. If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at 95. Expenses of issuing the bonds were $78,200.
2. Hoosier Company issued $20,225,000 par value 10% bonds at 96. One detachable stock warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $5.
3. Suppose Sepracor, Inc. called its convertible debt in 2014. Assume the following related to the transaction: The 11%, $10,342,000 par value bonds were converted into 1,034,200 shares of $1 par value common stock on July 1, 2014. On July 1, there was $58,600 of unamortized discount applicable to the bonds, and the company paid an additional $78,300 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.
Account Titles and Explanation
Debit
Credit
1.(To record bond issue)
2.(To record bond issue costs)

Answer 1

Journal Entry

Step-by-step explanation:

The Journal Entry is shown below:-

1. Cash Dr, $19,618,250

Discount on bonds payable Dr, $606,750

To Bonds payable $20,225,000

(Being Bonds issued is recorded)

Working Note:-

Cash = ($20,225,000 × (97 ÷ 100)

= $19,618,250

So, the bonds has been issued a discount. The par value of the bonds is 100.

2. Cash Dr, $19,416,000

Discount on bonds payable Dr, $1,820,250

To Bonds payable $20,225,000

To Paid in capital share warrants $1,011,250

(Being bonds issued is recorded)

Working Note:-

The Value of bonds issued at a discount

So, value of bonds = ($20,225,000 × ($96 ÷ $100)

= $19,416,000

Now, Value of warrants = ($20,225,000 ÷ 100) × $5

= $1,011,250

Total value of bonds including warrants = Value of bonds + Value of warrants

= $19,416,000 + $1,011,250

= $21,236,250

3. Debt conversion expense Dr, $78,300

Bonds payable Dr, $10,342,000

To discount payable $58,600

To common stock $1,034,200

To paid in capital in excess

of common stock $9,249,200

To cash $78,300

(Being debt conversion is recorded)