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On January 1, 2014, Gottlieb Corporation issued $3,010,000 of 10-year, 9% convertible debentures...

Question:

On January 1, 2014, Gottlieb Corporation issued $3,010,000 of 10-year, 9% convertible debentures at 103. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into 9 shares of Gottlieb Corporation $101 par value common stock after December 31, 2015. On January 1, 2016, $301,000 of debentures are converted into common stock, which is then selling at $112. An additional $301,000 of debentures are converted on March 31, 2016. The market price of the common stock is then $117. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis. Make the necessary journal entries for: (a) December 31, 2015. (c) March 31, 2016. (b) January 1, 2016. (d) June 30, 2016.

Debentures:

A debenture is a long term financial security that yields regular returns in the form of interest for the investor for the long term. A debenture is a fixed income debt financial instrument. It is issued by the government and companies.

Answer and Explanation:

(a)

Date Particulars Debit ($) Credit ($) Calculation
31/12/2015 Bond Interest Expense 130,935 135,450 - 4,515
Premium on Bonds Payable 4,515 (3,010,000/100 * 3) * 1/20
Cash 135,450 3,010,000 * 9% * 6/12


(b)

Date Particulars Debit ($) Credit ($) Calculation
1/01/2016 Bonds Payable 301,000
Premium on Bonds Payable 7,224
Common Stock 273,609 301,000/1,000 * 9 * 101
Paid-in Capital in Excess of Par 34,615 301,000 + 7,224 - 273,609


(c)

Date Particulars Debit ($) Credit ($) Calculation
31/03/2016 Bond Interest Expense 6,547 6,772.50 - 225.75
Premium on Bonds Payable 226 (7,224/8) * (3/12)
Bond Interest Payable 6,773 301,000 * 9% * 3/12
Bonds Payable 301,000
Premium on Bonds Payable 226 (7,224/8) * (3/12)
Common Stock 273,609 301,000/1,000 * 9 * 101
Paid-in Capital in Excess of Par 27,617 301,000 + 225.75 - 273,609


(d)

Date Particulars Debit ($) Credit ($) Calculation
30/06/2016 Bond Interest Expense 118,294
Premium on Bonds Payable 3,612 90,300 * 80% * 1/20
Bond Interest Payable 6,773 301,000 * 9% * 1/4
Cash 115,133 (3,010,000 - 301,000 - 301,000) * 9% * 6/12) + 6,772.50

Learn more about this topic:

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Sources of Long-Term Financing

from Business 100: Intro to Business

Chapter 23 / Lesson 4
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