Question

Streamland SA started producing a new mini series featuring super heroes with useless powers. The management board considered various financing options. The CFO, Sam Yang, suggested to issue convertible bonds, an instrument that had not been used by the company before. The other board members were hesitant at first but eventually agreed that convertible bonds were the best option to finance this production. Therefore, Streamland SA issued €18,000,000 of 8%, 5-year convertible bonds on January 1, 2020, at 95 with interest payable on December 31. Each of the 18,000 €1,000 bonds is convertible into 10 ordinary shares (par value of €1). Using the prevailing market interest rates at the issuance date for similar non-convertible bonds, the bonds would have been sold at 90. Any bond premium or discount is amortized annually using the effective-interest method.

                                                         

a) Prepare the journal entry(ies) to record the issuance of the convertible bonds on January 1, 2020. (3p)

above the question:

i don't understand how to account for the issuance of the bonds because they are at discount
                                              

Answer 1

Solution:

Issue of Convertible Bonds
01-01-2020	Cash (1,800,000*95%)	17100000
	Discount on Bonds Payable (1,800,000*5%)	900000
	Convertible Bonds Payable		18000000
	Issue of €18,000,000 of 8%, 5-year convertible bonds on January 1, 2020, at 95 with interest payable on December 31.

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