Question

1. On April 1, 2020 Garr Co. issued $3,000,000 of 5%, 5-year convertible bonds at a price of 98. The bonds pay interest on April 1 and October 1. Bond discount is amortized each interest payment period on a straight-line basis.

On April 1, 2021, all of these bonds were converted into 20,000 shares of $5 par common stock.

a) Prepare the entry to record the original issuance of the convertible bonds.

b) Prepare the entries to record the interest payment and discount amortization at October 1, 2020 and April 1, 2021.

c) Prepare the entry to record the conversion on April 1, 2021. (6 points)

Answer 1

Journal entries

Date	Name of the accounts and explanation	Debit	Credit
April 1, 2020	Cash { 30,000 X $ 98}	$ 2,940,000
	Discount on bond payable { 30,000 X $ 2}	$ 60,000
	Bond payable { 30,000 X $ 100}		$ 3,000,000
October 1, 2020	Interest on bond payable	$ 81,000
	Discount on bond payable { $ 60,000/ 5} X 6/12		$ 6,000
	Cash { $ 3,000,000 X 5/100 X 6/12}		$ 75,000
April 1, 2021	Interest on bond payable	$ 81,000
	Discount on bond payable { $ 60,000 /5 } X 6/12		$ 6,000
	Cash { $ 3,000,000 X 5/100 X 6/12}		$ 75,000
April 1,2021	Bond payable	$ 3,000,000
	Discount on bond payable		$ 60,000
	Common stock { 20,000 X $ 5}		$ 100,000
	Additional paid in capital { 20,000 X $ 142)		$ 2,840,000