Headland Inc. issued $4,130,000 of 11%, 10-year convertible bonds on June 1, 2020, at 98 plus accrued interest. The bonds were dated April 1, 2020, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2021, $1,548,750 of these bonds were converted into 24,000 shares of $21 par value common stock. Accrued interest was paid in cash at the time of conversion. (a) Prepare the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued. (b) Prepare the entry to record the conversion on April 1, 2021. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

A. Dr Interest Payable $75,717

Dr Interest expense $154,233

Cr Discount on Bonds payable $2,800

Cr Cash $227,150

B. Dr Bonds payable $1,548,750

Cr Discount on Bonds payable $28,350

Cr Common Stock$504,000

Cr Paid-in capital in excess of par- Common Stock $1,073,100

Explanation:

(a) Preparation of the entry to record the interest expense at October 1, 2020. Assume that accrued interest payable was credited when the bonds were issued.

Dr Interest Payable $75,717

[($4,130,000*0.11)/2*(2/6)]

Dr Interest expense $154,233

[($4,130,000*.11)/2*(4/6) + $2,800]

Cr Discount on Bonds payable $2,800

($700*4)

Cr Cash $227,150

[ ( $4,130,000*.11)/2]

Calculation for the discount per month

First step is to calculate the remaining months

Months remaining= (10 years *12-2)

Months remaining=118 months

Second step is to calculate the Total discount

Total Discount=$4,130,000-($4,130,000*.98)

total discount=$4,130,000-$4,047,400

total discount=$82,600

Now let calculate the discount per month

Discount per month=($82,600/118)

Discount per month=$700

(b) Preparation of the entry to record the conversion on April 1, 2021

Dr Bonds payable $1,548,750

Cr Discount on Bonds payable $28,350

Cr Common Stock$504,000

(24,000*$21)

Cr Paid-in capital in excess of par- Common Stock $1,073,100

[$1,548,750+$28,350-($504,000)]

Calculation for Unamortized bond discount

Discount of the bonds $30,975

($82,600*(3/8))

Less Discount amortized ($2,625)

[($82,600/118)*10 years*(3/8)]

Unamortized bond discount $28,350

($30,975-$2,625)

the correct answer is - no.

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