Question

Carla Inc. issued $2,820,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for 11% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $51,600, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Carla Inc.s $100 par value common stock for each $1,000 of bonds. On August 1, 2021, $282,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash. Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.) (a) August 1, 2021. (Assume the book value method is used.) (b) August 31, 2021. (c) December 31, 2021, including closing entries for end-of-year.

Answer 1

No.	Date	Account titles and explanation	Debit	Credit
(a)	Aug. 1, 2021	Bonds payable	282000
		Discount on bonds payable		4601
		Common stock (282*100*8)		225600
		Paid-in capital in excess of par		51799
		(to record the issuance of shares of common stock and the rite-off of the discount on bonds payable)
	Aug. 1, 2021	Interest payable (282000*11%*1/12)	2585
		Cash		2585
		(to record payment in cash of interest accrued on bonds)
(b)	Aug. 31, 2021	Interest expense	387
		Discount on bonds payable		387
		(to record amortization of discount on bonds)
	Aug. 31, 2021	Bond Interest expense (2820000-282000)*11%*1/12	23265
		Interest payable		23265
		(to record accrual of interest on bonds)
(c)	Dec. 31, 2021	Income summary	302220
		Interest expense		302220
		(to close expense account)

Unamortized discount on bonds payable:
Amount to be amortized over 120 months	5100
Amount of monthly amortization ($51600 / 120)	430
Amortization for 13 months to Jul 31, 2021, ($430 × 13)	5590
Balance unamortized Jul 31, 2020, ($51600 – $5590)	46010
10% applicable to bonds converted	4601
Balance Aug 1, 2021	41409
Remaining monthly amortization over remaining 107 months	$387

Amortization of bond discount charged to bond interest expense in 2021 would be as follows
7 months × $430	3010
5 months × $387	1935
Total	$4945
Interest on Bonds:
$2,820,000 × 11.00%	310200
Amount per month ($310200 / 12 months)	25850
11% on $(2820000-282000)	279180
Amount per month ($279180 / 12 months)	23265
Interest for 2021 would be as follows:
7 months × $25850	180950
5 months × $23265	116325
Total	297275
Total interest
Amortization of discount	4945
Cash interest paid	297275
Bond interest expense	$302220