Question

On January 1, 2021, Madison Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.8 million. Madison recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison’s no par common stock. Madison records interest by the straight-line method. On June 1, 2023, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2023. By June 30, all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted.
Required:
1. & 2. Prepare the journal entries for the issuance of the bonds by Madison and interest payment for June 30, 2021.
3. Prepare the journal entries for the June 30, 2023, interest payment by Madison and the conversion of the bonds (book value method).

Answer 1

Answer:

1.  Date       General Journal                               Debit           Credit

Jan 1            Cash                                               $40,800,000

                          Convertible bond payable                         $40,000,000  

                           Premium on bond payable                        $800,000

Jun 30 2021  Interest expenses                        $1,160,000

                      Premium on bond payable          $40,000

                      (800,000/10 * 1/2)

                             Cash                                                            $1,200,000

                             (40,000,000 * 6% * 1/2)

2.  Date       General Journal                             Debit          Credit

June 30      Interest Expenses                        $1,160,000

2023           Premium on bond payable         $40,000

                          Cash                                                             $1,200,000

                           ($40,000,000 *6%*1/2)

June 30       Convertible bonds payable         $40,000,000

2023            Premium on bond payable           $600,000

                     ($800,000 - ($40,000*5)

                           Common stock                                            $40,600,000