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On January 1, 2021, Gless Textiles issued $28 million of 7%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99 (that is, 99% of face amount). Century Services purchased 20% of the issue as an investment. Required: 1. Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond investment by Century. 2. Prepare the journal entries for the June 30, 2025, interest payment by both Gless and Century assuming both use the straight-line method. 3. On July 1, 2026, when Gless’s common stock had a market price of $33 per share, Century converted the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method).

Respuesta :

Answer:

JOURNAL ENTRY

Gless :Debit bank $28 million , bonds convertible $28 million

Century : Debit financial investment $5600000 credit Bank $5600000

2.Gless : Debit  Interest expense $980000, Credit Bank $980000

Century ; Debit Bank $196000 , Credit interest income $196000

3. Gless : Debit Bonds payable $184000 , credit common stock $184800

Century : Debit investment common stock $184800, credit financial investment bond $184800

Explanation:

Convertible instruments have both equity and liability components in them but since similar yield rate is not available then we can assume that the bonds are liability until converted and that the whole of 28mllion is liablity .

purchase by Century 28 million * 0.20 = $5600000

interest = bond * 7% * 6/12

and also = investment *7% *6/12 for Century

conversion = 560000/1000= 5600 shares * 33 =$184800

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