Answer:
A. Dr Interest Payable $63,167
Dr Interest expense $127,617
Cr Discount on Bonds payable $1,284
Cr Cash $189,500
B. Dr Bonds payable $1,421,250
Cr Discount on Bonds payable $13,008
Cr Common Stock $612,000
Cr Paid-in capital in excess of par- Common Stock $796,242
Explanation:
(a) Preparation of the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued.
Dr Interest Payable $63,167
[($3,790,000*.10)/2*(2/6)]
Dr Interest expense $127,617
[($3,790,000*.10)/2*(4/6) + $1,284]
Cr Discount on Bonds payable $1,284
($321*4)
Cr Cash $189,500
[ ( $3,790,000*.10)/2]
(To record interest expense at October 1, 2020.)
Calculation for the discount per month
First step is to calculate the remaining months
Months remaining= (10 years *12-2)
Months remaining=118 months
Second step is to calculate the Total discount
Total Discount= $3,790,000-($3,790,000*.99)
Total discount=$3,790,000-$3,752,100
Total discount=$37,900
Now let calculate the discount per month
Discount per month=($37,900/118)
Discount per month=$321
(b) Preparation of the entry to record the conversion on April 1, 2021
Dr Bonds payable $1,421,250
Cr Discount on Bonds payable $13,008
Cr Common Stock $612,000
(34,000*$18)
Cr Paid-in capital in excess of par- Common Stock $796,242
[$1,421,250-($13,008+$612,000)]
(To record conversion of bond into 34,000 shares.)
Calculation for Unamortized bond discount
Discount of the bonds $14,213
($37,900*(3/8))
Less Discount amortized ($1,205)
[($37,900/118)*10 years*(3/8)]
Unamortized bond discount $13,008
($14,213-$1,205)
