Question

LIEN company issues $5,600,000 of 12%, 40-year convertible bonds at 103. At the time of conversion,...

LIEN company issues $5,600,000 of 12%, 40-year convertible bonds at 103. At the time of conversion, the Premium on Bonds Payable account has a balance of $150,000. All convertible bonds are converted into common stocks, and each $1,000 bond is convertible into 10 shares of common stock with a par value of $1 per share.

1) Prepare the journal entry to record the issuance of convertible bonds.

2) Prepare the journal entry to record the bond conversion.

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Answer #1

no of bonds issued = 5600000 / 100

= 56000 bonds

issue price of the bonds = 56000 * 103

= $ 5768000

premium on bonds = issue price - par Value

= 5768000 - 5600000

= $ 168000

given Each bond converted into 10 Shares

no of Shares issued = (5600000 / 1000 ) * 10

= 56000 Shares

par value of Shares issued = 56000 * $1

= $ 56000

Journal Entries
Date Accounts Name Debit Credit
1 Bond Issue
Cash 5768000
      Premium on bonds 168000
     Bonds Payable 5600000
conversion
2 bonds payable 5600000
premium on bonds 150000
                 Common Stock 56000
additional paid in excess of par - common stock ( 5600000+1500000-56000) 5694000
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