Question

On January 1, 2017, Desert Windows Corporation issued $1,000,000 of 15-year, 12% convertible debentures at 110. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into four shares of Desert Windows Corporation $5 par value common stock after December 31, 2018. On January 1, 2019, $400,000 of the debentures is converted into common stock, which is then selling at $300. An additional $400,000 of the debentures is converted on May 31, 2019. The market price of the common stock is then $310. Accrued interest at May 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Required:

Make the necessary journal entries for:

(a) December 31, 2018. (c) May 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method.

Answer 1

DATE	ACCOUNT TITLES AND EXPLANATION	DEBIT	CREDIT
31-12-2018	INTEREST PAID ON CONVERTIBLE DEBENTURES A/C	60000
	TO CASH A/C		60000
31-12-2018	STATEMENT OF PROFIT & LOSS A/C	120000
	TO INTEREST PAID ON CONVERTIBLE DEBENTURES A/C		120000
31-12-2018	BOND PREMIUM AMORTIZED A/C	6667
	TO STATEMENT OF PROFIT & LOSS A/C		6667
01-01-2019	DEBENTURES A/C	400000
	TO SHARE CAPITAL A/C		8000
	TO SECURITIES PREMIUM A/C		392000
31-05-2019	INTEREST PAID ON CONVERTIBLE DEBENTURES A/C	20000
	TO INTEREST PAYABLE A/C		20000
31-05-2019	DEBENTURES A/C	400000
	TO SHARE CAPITAL A/C		8000
	TO SECURITIES PREMIUM A/C		392000
30-06-2019	INTEREST PAYABLE A/C	20000
	INTEREST PAID ON CONVERTIBLE DEBENTURES A/C	12000
	TO CASH A/C		32000