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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On July 1, 2020, Tuttle Company had bonds payable outstanding with a face value of $200,000 and a book value of $194,000. The interest on these bonds was paid on June 30. When these bonds were issued, each $1,000 bond was convertible into 20 shares of $10 par common stock. To induce conversion, on June 15, 2020, the terms were changed so that each bond was convertible into 22 shares of common stock if the conversion was made within 30 days. All the bonds were converted on July 1, 2020, when the market price of the common stock was $50 per share.

Using the book value method, record the conversion of the bonds on July 1, 2020.

To determine

Prepare the journal entry to record conversion of the bond as on July 1, 2020 using the book value method.

Explanation

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare the journal entry to record conversion of the bond as on July 1, 2020.

DateAccount titles and ExplanationDebitCredit
July 1, 2020Bonds payable$200,000  
 Bond conversion expense (3)$20,000  
      Discount on bonds payable (2) $6,000
      Common stock (1) $44,000
      Additional paid - in capital on common stock (balancing figure) $170,000
 (To record conversion of bonds)  

Table (1)

Working notes:

(1)Calculate common stock.

Common stock =(Bonds payableNumber of convertible bonds×Convertible common shares×Face valueper share)=($200,000$1,000)×22Common shares×$10=200×22×$10=$44,000

(2)Calculate Discount on bonds payable.

Discount on bonds payable =Face value Market value=$200,000$194,000=$6,000

(3)Calculate bond conversion expense

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