E16-6 (Conversion of Bonds) On January 1, 2014, Gottlieb Corporation issued $4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into eight shares of Gottlieb Corporation $100 par value common stock after December 31, 2015. On January 1, 2016, $400,000 of debentures are converted into common stock, which is then selling at $110. An additional $400,000 of debentures are converted on March 31, 2016. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis. Instructions Make the necessary journal entries for: (a) December 31, 2015. (c) March 31, 2016. (b) January 1, 2016. (d) June 30, 2016. Record the conversions using the book value method.

For part A, How did you calculate the $80,000 and 1/20? Where do those figures come from?

Bond Interest Expense 156,000

Premium on Bonds Payable 4,000

($80,000 X 1/20)

Cash ($4,000,000 X 8% X 6/12) 160,000

Number of convertible debentures issued = $4,000,000/100 = 40,000

The convertible debentures are issued at a premium at $102 which implies $2 is premium, so the premium is to be amortised

Premium = 40,000*2 = 80,000

The bond is issued for 10 years and interest is paid semi-annually so the number of period = 10*2 = 20

So the premium is amortized over 20 period @4000 per period

I am VERY close to understanding part a, but now my question is: Where are you getting the number of shares (100) to divide the $4,000,000 by? (I.E. Number of convertible debentures issued = $4,000,000/100 = 40,000).