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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 2, 2019, Lindsay Corporation issued $800,000 of 8% convertible bonds at par. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31. Each $1,000 bond could be converted into 26 shares of the company’s $2.50 par value common stock. Alternatively, Lindsay has the right to settle the bonds in cash instead of issuing common stock. Similar bonds without the conversion feature would carry a 10% stated interest rate.

Required:

Prepare the journal entry to record the issuance of the bonds.

To determine

Prepare journal entry to record issuance of the bonds.

Explanation

Bonds:

Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Prepare journal entry to record issuance of the bonds.

DateAccount Titles and ExplanationDebitCredit
 Cash$800,000  
 Discount on bonds payable (3)$99,698.08  
      Bonds payable $800,000
       Paid in capital - conversion feature (balancing figure) $99,698.08
 (To record issuance of bonds)  

Table (1)

  • Cash is a current asset, and it is increased. Therefore, debit cash account for $800,000.
  • Discount on bonds payable is a contra liability, and it is increased. Therefore, debit discount on bonds payable account for $99,698.08.
  • Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $800,000.
  • Paid in capital – conversion feature is a component of stockholders’ equity, and it is increased. Therefore, credit paid in capital – conversion feature account for $99,698.08.

Working note:

(1)Calculate issue price of the bonds.

ParticularsAmount (A)Present value factor (B)Value of the Bonds (A × B)
Present value of principal$800,000 0.376889$301,511.20
Add: Present value of interest (2)$32,000 12.462210$398,790.72
Selling price of the bonds  $700,301...

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