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Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on Jan 1, 2017 at 102. The...

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on Jan 1, 2017 at 102. The bonds were dated Jan 1, 2017 with interest payable June 30 and December 31. Bond discount is amortized semiannually on a straight-line basis. Each $1,000 debenture is convertible into 40 shares of Chang $20 par common stock. On Jan 1, 2018, $1,200,000 of these bonds were converted. What should be the amount of the debit to Interest Expense on June 30, 2017?

a.   $306,000

b.   $264,000

c.   $270,000

d.   $276,000

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Answer #1

Premium on Bond Payable

Face Value of the Bond = $60,00,000

Issue Price of the Bond = $61,20,000 [$60,00,000 x 102%]

Premium on Bond Payable = Issue Price of the Bond – Face Value of the Bond

= $61,20,000 - $60,00,000

= $120,000

Amortization of Premium on Bond Payable during each semiannual period using straight line method of amortization

= Premium on Bond Payable / Number of Periods

= $120,000 / (10 Years x 2)

= $120,000 / 20 Periods

= $6,000 per each semi-annual period

Cash Payment = Face value of the bond x Coupon rate x ½

= $60,00,000 x 9% x ½

= $270,000

Therefore, the amount to debited to Interest Expense on June 30, 2017 = Cash Payment - Amortization of Premium on Bond Payable

= $270,000 - $6,000

= $264,000

“Hence, the amount to debited to Interest Expense on June 30, 2017 would be (B). $264,000”

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