On January 1, 2017, Larkspur Corporation issued $4,020,000 of 10-year, 8% conver
ID: 2598674 • Letter: O
Question
On January 1, 2017, Larkspur Corporation issued $4,020,000 of 10-year, 8% convertible debentures at 104. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into 8 shares of Larkspur Corporation $100 par value common stock after December 31, 2018. On January 1, 2019, $402,000 of debentures are converted into common stock, which is then selling at $110. An additional $402,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $114. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis. Make the necessary journal entries for: (a) December 31, 2018. (c) March 31, 2019. (b) January 1, 2019.(d) June 30, 2019.Explanation / Answer
Solution 1:
(a) December 31, 2018
Bond Interest Expense........................................................................ 152,760
Premium on Bonds Payable................................................................ 8,040
($160,800 X 1/20)
Cash ($4,020,000 X 8% X 6/12).............................................. 160,800
(b) January 1, 2019
Bonds Payable.................................................................................... 402,000
Premium on Bonds Payable................................................................ 12,864
Common Stock......................................................................... 321,600
[8 X $100 X ($402,000/$1,000)]
Paid-in Capital in Excess of Par................................................ 93,264
Total premium
($4,020,000 X .04) $160,800
Premium amortized
($160,800 X 2/10) 32,160
Balance $128,640
Bonds converted
($400,000 ÷ $4,000,000) 10%
Related premium
($128,640 X 10%) 12,864
(c) March 31, 2019
Bond Interest Expense........................................................................ 7,638
Premium on Bonds Payable................................................................ 402
($12,864 ÷ 8 years) X 3/12
Bond Interest Payable............................................................... 8,040
($402,000 X 8% X 3/12)
March 31, 2019
Bonds Payable.................................................................................... 402,000
Premium on Bonds Payable................................................................ 12,864
Common Stock......................................................................... 320,000
Paid-in Capital in Excess of Par................................................ 94,864
Premium as of January 1, 2019
for $400,000 of bonds $12864
$12,864 ÷ 8 years remaining
X 3/12 (402 )
Premium as of March 31, 2009
for $400,000 of bonds $12,462
(d) June 30, 2019
Bond Interest Expense........................................................................ 121,203
Premium on Bonds Payable................................................................ 7,437
Bond Interest Payable......................................................................... 8,040
($402,000 X 8% X 1/4)***
Cash ....................................................................................... 136,680*
[Premium to be amortized:
($160,800 X 80%) X 1/20 = $7,437, or
$118,992** ÷ 16 (remaining interest and
amortization periods) = $3,200]
***Total to be paid:($3,216,000 X 8% ÷ 2) + $8,040 = $136,680
***Original premium $160,800
2017 amortization (8,040 )
2018 amortization (8,040 )
Jan. 1, 2019 write-off (12,864)
Mar. 31, 2019 amortization (402 )
Mar. 31, 2019 write-off (12,462)
$118,992
Solution 2:
Date
Fair
Value
Cumulative Compensation Recognizable
Percentage Accrued
Cumulative Compensation
Accrued
to Date
Expense 2014
Expense 2015
Expense 2016
Expense
2017
Expense 2018
12/31/14
R$ 6
R$187,800
25%
R$ 46,950
R$46,950
78,250
R$78,250
12/31/15
8
250,400
50%
125,200
250,400
R$250,400
12/31/16
16
500,800
75%
375,600
(187,800)
R$(187,800)
12/31/17
6
187,800
100%
187,800
406,900
R$406,900
12/31/18
19
594,700
—
R$594,700
Date
Fair
Value
Cumulative Compensation Recognizable
Percentage Accrued
Cumulative Compensation
Accrued
to Date
Expense 2014
Expense 2015
Expense 2016
Expense
2017
Expense 2018
12/31/14
R$ 6
R$187,800
25%
R$ 46,950
R$46,950
78,250
R$78,250
12/31/15
8
250,400
50%
125,200
250,400
R$250,400
12/31/16
16
500,800
75%
375,600
(187,800)
R$(187,800)
12/31/17
6
187,800
100%
187,800
406,900
R$406,900
12/31/18
19
594,700
—
R$594,700