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
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.
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).
|1) Journal entries|
|convertible bond payable ( 75,000,000*97%)||72,750,000|
|premium on bonds payable||3,350,000|
|(to record issuance of the bonds)|
|convertible bonds payble(75m-(75m*97%)/20||112,500|
|( to record interest payment)|
|1) Interest expenses||2,362,500|
|convertible bonds payable||112,500|
|(to record interest payment)|
|2) Convertible bond payable||73,312,500|
|equity conversion option||3,350,000|
|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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