Question

Question 3 View Policies Current Attempt in Progress Blossom Inc. issued $2,700,000 of convertible 10-year bonds on July 1, 2020. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $52,800, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Blossom Inc's $100 par value common stock for each $1,000 of bonds. On August 1, 2021, $270,000 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 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. Account Titles and Explanation Debit Credit No. Date (a) Aug 1, 2021 (To record the issuance of shares of common stock and the write-off of the discount on bonds payable.) Aug. 1, 2021 (To record payment in cash of interest accrued on bonds.) (b) Aug. 31, 2021 (To record amortization of discount on bonds.) Aug. 31, 2021 (To record accrual of interest on bonds.) (c) Dec 31, 2021 (To close expense account)

Answer 1

	No.	Date	Account titles and explanation					Debit	Credit
	(a)	Aug 1,2021	Bonds payable					270000
			Discount on bonds payable				(Note:1)		4708
			Common stock		(270000/1000)*8*100				216000
			Paid in capital in excess of par value				(Plug)		49292
			(To record the issuance of shares of common stock
			and the write-off of the discount on bonds payable)
		Aug 1,2021	Interest payable		(270000*12%*1/12)			2700
			Cash						2700
			(To record payment in cash of interest accrued on
			bonds)
	(b)	Aug 31,2021	Interest expense				(Note:2)	396
			Discount on bonds payable						396
			(To record amortization of discount on bonds)
		Aug 31,2021	Interest expense		(2700000*90%*12%*1/12)			24300
			Interest payable						24300
			(To record accrual of interest on bonds)
	c)	Dec 31,2021	Income summary				(Note:3)	315560
			Interest expense						315560
			(To close expense account)
	Note:1
	Face value of bonds issued=$ 2700000
	Face value of bonds converted=$ 270000
	10% bonds converted
	Discount on issue of bonds=$ 52800
	Discount amortized on straight-line basis
	Life of the bond=10 years=10*12=120 months
	Discount to be amortized per month=52800/120=$ 440
	Discount amortized from July 1,2020 to Aug 1,2021 (13 months)=440*13=$ 5720
	Unamortized discount=52800-5720=$ 47080
	Unamortized discount related to bonds converted=47080*10%=$ 4708
	Note:2
	Unamortized discount related to 90% bonds=47080*90%=$ 42372
	Remaining period=120-13=107 months
	Discount to be amortized per month=42372/107=$ 396
	Note:3
	Interest expense includes amortization and monthly bond interest
	Amortization:
	From Jan 1 to Aug 1 (7 months)=7*440=$ 3080
	From Aug 1 to Dec 31 (5 months)=5*396=$ 1980
	Total amortization for the year=3080+1980=$ 5060
	Interest on bonds:
	From Jan 1 to Aug 1 (7 months)=2700000*12%*(7/12)=$ 189000
	From Aug 1 to Dec 31 (5 months)=(2700000-270000)*12%*(5/12)=$ 121500
	Total interest for the year=189000+121500=$ 310500
	Interest expense for the year=5060+310500=$ 315560