Bonita Industries issued $6780000 of 9%, ten-year convertible bonds on July 1, 2
ID: 2566680 • Letter: B
Question
Bonita Industries issued $6780000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $1356000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion. If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2017?
Explanation / Answer
Solution.
What should be the amount of the debit to "interest expense" on October 1, 2017.
Face value of bond = $6,780,000
Issued amount of bond = $6,780,000 x 96.10% = $6,615,580
Interest expense = ($6,780,000 - $6,615,580) / 117 = $1,405 per month.
Interest expense = ($6,780,000 x 9% x 3/12) + (3 x $1,405 ) = $156,765.