On January 1, 2014, Gottlieb Corporation issued $3,510,000 of 10-year, 8% convertible debentures...

Question:

On January 1, 2014, Gottlieb Corporation issued $3,510,000 of 10-year, 8% convertible debentures at 103. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into 8 shares of Gottlieb Corporation $101 par value common stock after December 31, 2015. On January 1, 2016, $351,000 of debentures are converted into common stock, which is then selling at $113. An additional $351,000 of debentures are converted on March 31, 2016. The market price of the common stock is then $118. 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.

Record the conversions using the book value method

Debenture:

Debentures are the debt instrument issued to borrow funds for a particular period. It is a legally binding contract between the fund provider and company. Fund provider will receive periodic interest as a consideration for the fund provided by him to company.

Answer and Explanation:

Journal Entries

No. Date Account Titles and explaination Debit Credit
a. December 31, 2015 Interest on debenture a/c----------------------------Dr 140400 -
- - To Cash a/c - 140400
- - (Being Interest paid to debenture holders) - -
- - - - -
- December 31, 2015 Premium on debenture a/c----------------------------Dr 10530 -
- - To Profit and Loss a/c - 10530
- - (Being premium on debenture amortized) - -
- - - - -
b. January 1,2016 8% convertible debenture a/c--------------------------Dr 351000 -
- - To Common Stock a/c - 283608
- - To Security Premium a/c - 67392
- - (Being debenture converted into common stock) - -
- - - - -
- January 1,2016 Premium on debenture a/c-----------------------------Dr 8424 -
- - To Profit and loss a/c - 8424
- - (Being premium on debenture amortized in proportion of debenture converted ) - -
- - - - -
c. March 31, 2016 8% convertible debenture a/c--------------------------Dr 351000 -
- - To Common Stock a/c - 283608
- - To Security Premium a/c - 67392
- - (Being debenture converted into common stock) - -
- - - - -
- March 31,2016 Premium on debenture a/c-----------------------------Dr 9360 -
- - To Profit and loss a/c - 9360
- - (Being premium on debenture amortized in proportion of debenture converted ) - -
- - - - -
- June 30, 2016 Interest on debenture a/c---------------------------- Dr 119340 -
- - To Cash a/c - 119340
- - (Being interest paid to debenture holder) - -

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Sources of Long-Term Financing

from Business 100: Intro to Business

Chapter 23 / Lesson 4
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