Question

On January 1, 2018, Fowl Products issued $75 million of 7%, 10-year convertible bonds at a net price of $76.1 million. Fowl recently issued similar, but nonconvertible, bonds at 97 (that is, 97% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Fowl’s no par common stock. Fowl records interest by the straight-line method.
  
On June 1, 2020, Fowl notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2020. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Fowl paid the semiannual interest and issued the requisite number of shares for the bonds being converted.

Required:
1. Prepare the journal entry for the issuance of the bonds by Fowl.
2. Prepare the journal entry for the June 30, 2018, interest payment.
3. Prepare the journal entries for the June 30, 2020, interest payment by Fowl and the conversion of the bonds (book value method).

Answer 1

1) Journal entries
Particulars	Debit	Credit
cash( given)	76,100,000
convertible bond payable ( 75,000,000*97%)		72,750,000
premium on bonds payable		3,350,000
(to record issuance of the bonds)
2)
Interest expenses	2,362,500
convertible bonds payble(75m-(75m*97%)/20		112,500
cash (75000000*3%)		2,250,000
( to record interest payment)
3)
1) Interest expenses	2,362,500
convertible bonds payable		112,500
cash		2,250,000
(to record interest payment)
2) Convertible bond payable	73,312,500
equity conversion option	3,350,000
common stock		76,662,500
Convertible bond payable	72,750,000
add: amortization of 5 period (112,500*5)	562,500
Balance at conversion	73,312,500

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