On January 1, 2018, Gless Textiles issued $12.8 million of 8%, 10-year convertib
ID: 2547439 • Letter: O
Question
On January 1, 2018, Gless Textiles issued $12.8 million of 8%, 10-year convertible bonds at 104. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 50 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98 (that is, 98% of face amount). Century Services purchased 9% of the issue as an investment.
Required:
Assume Gless Textiles prepares its financial statements according to International Financial Reporting Standards. Prepare the journal entry for the issuance of the bonds by Gless using the net method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
Explanation / Answer
While accounting for a covertable bond it is very important to differenciate equity & liability elements of the bond.
Issue price of the convertable bond = $ 104.
Bonds that are similar in all respects, except that they are nonconvertible are currently selling at = $ 98.
Hence the liability portion of each bond is $ 98.
Whereas the equity portion of the convertable bond = 104-98 = $ 6
Total number of 8% 10 year convertable bonds issued =12,800,000/100=128,000
Total cash received through issue of bonds = 128,000 x 104 = $ 13,312,000
Total Equity element in the bond = 128,000 x 6 = $ 768,000
Total liability element in the bond = 128,000 x 98 = $ 12,544,000
Therefore the journal entry for the issuance of the bonds by Gless is
01-jan 2018 Cash a/c Dr 13,312,000
To Liability component of convertible bonds a/c Cr 12,544,000
To Equity component of convertible bonds a/c Cr 768,000
(Being128,000 8% 10 year convertable bonds issued @ $ 104)