Question

On January 2, 20x5, a Trump Inc. issues convertible bonds maturing on December 31,

20x14. On the maturity date, these bonds are mandatorily convertible into common

shares. The bonds have a face value of $1,000,000 and pay a coupon of 4% on June 30

and Dec 31. The bonds were issued to yield 4.6%. The cash proceeds of $991,500

received on the bond issue were credited to the Convertible Bonds Payable Account and

the cash coupons paid were debited to Interest expense.

Required – Prepare the adjusting journal entries required at December 31, 20x5.

Answer 1

Answer:

Date	Account title and Explanation	Debit	Credit
Dec 31,20X5	Interest expense	$22,869
	Discount on bonds payable		$2,869
	Cash		$20,000
	[To record payment of Interest]

Calculations:

June 30,20X5:
Interest expense [$991,500 x 4.6% x (6/12)]	$22,804.50
Cash interest [ $1,000,000 x 4% x (6/12)]	$20,000.00
Discount amortized	$2,804.50
December 30,20X5:
Interest expense [($991,500+$2,804.50) x 4.6% x (6/12)]	$22,869.00
Cash interest [ $1,000,000 x 4% x (6/12)]	$20,000.00
Discount amortized	$2,869.00