Question

On January 1, 2017, Gless Textiles issued $12 million of 9%, 10-year convertible bonds. The bonds were issued at a price that provided a yield to maturity of 8% (market rate). The bonds pay interest on June 30 and December 31 each year. Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at a yield to maturity of 11%. Answer the following questions 1) according to US GAAP and 2) according to IFRS.

Prepare journal entries for the issuance of the bonds by Gless.

Prepare journal entries for the June 30, 2017 interest payment.

On July 1, 2018, when Gless’s common stock had a market price of $33 per share, ten percent of the bonds were converted into common stock. (Use the book value method to record the conversion under both US GAAP and IFRS.)

Answer 1

given that

On January 1, 2017, Gless Textiles issued $12 million of 9%, 10-year convertible bonds.

mentioned that

The bonds were issued at a price that provided a yield to maturity of 8% (market rate). The bonds pay interest on June 30 and December 31 each year.

also given that

Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock.

journal entries

passing journal assuming the book value approach

1.

cash a/c dr 12120000

to bonus payable a/c 12000000

to premium on bonds payable 120000

2.

intrest expense a/c dr 534000

amount of bond premium a/c dr 6000

to cash a/c 540000

3.

bonus payable a/c dr 12000000

premium on bonds payable a/c dr 54000

to common stock a/c 480000

to paid in capital in excess of par 11574000