Question

On January 1, 2014, Gottlieb Corporation issued $4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into eight shares of Gottlieb Corporation $100 par value common stock after December 31, 2015.
On January 1, 2016, $400,000 of debentures are converted into common stock, which is then selling at $110. An additional $400,000 of debentures is converted on March 31, 2016. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date.

Bond premium is amortized on a straight-line basis.

Instructions

Make the necessary journal entries for:

(a)December 31, 2015.
(b) January 1, 2016.
(c)March 31, 2016
(d) June 30, 2016.

Answer 1

Answer:

The journal entries for the given economic entries are done below:

Explanation:

(a) December 31, 2015.

Bonds Payable…………………………………….$4,000,000

Premium on Bonds Payable……………………….$80,000

            Common Stock………………………………………..$3,200,000

            Paid in capital in excess of par value…..…$880,000

(b) January 1, 2016.

Bonds Payable…………………………………………..$400,000

  Common Stock………………………………………………$400,000

*To record $400,000 debentures converting to common stock.

Cash…………………........……………………..$352,000

Discount on bonds payable………….$48,000

  Bonds Payable………………………………$400,000

*To record selling stock at $110

(c) March 31, 2016.

Bonds Payable…………………………$400,000

 Common Stock………….......………………..$400,000

*To record 400,000 debentures converting to Common Stock

Cash…………………………………................…..$368,000

Discount on bonds payable………………$32,000

 Bonds Payable……………………………..........…....….$400,000

*To record the sale of common stock at $115

(d) June 30, 2016.

Interest Expense……………..$160,000

  Interest Payable……………………$160,000

*To record payment of interest expense on Bonds

Computations-

Interest Expense= $4,000,000X8%X6/12= $160,000 .