Question

On January 1, 2021, Gless Textiles issued $17 million of 10%, 20-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99 (that is, 99% of face amount). Century Services purchased 20% of the issue as an investment.

Required:
1. Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond investment by Century.
2. Prepare the journal entries for the June 30, 2025, interest payment by both Gless and Century assuming both use the straight-line method.
3. On July 1, 2026, when Gless’s common stock had a market price of $33 per share, Century converted the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method).

Answer 1

1)

Journal entry for the issuance of bonds

By cash a/c. Dr. $1717m

To 10% convertible bonds a/c. Cr. $ 1717m

Journal for puchase of bonds as an investment by century

By 10% convertible bonds in gless textiles. A/c. Dr. $343.4m

To cash a/c. Cr. $343.4m

2)

Interest payment for June 30 2025 in the books of gless textiles

By interest on bonds a/c. Dr. $85.85m

To cash a/c. Cr. $85.85m

Entry for Receipt of interest by century

By cash a/c. Dr. $17.17m

To intrest on investment. A/c. Cr. $17.17m