Issuance of Convertible Bonds

Joy Insurance decides to finance expansion of its physical facilities by issuing convertible debenture bonds. The terms of the bonds follow: maturity date 10 years after May 1, 20Y1, the date of issuance; conversion at option of holder after two years; 20 shares of $1 par value stock for each $1,000 bond held; interest rate of 12% and call provision on the bonds of 102. The bonds were sold at 101.

1. Give the entry on Joy's books to record the sale of $900,000 of bonds on July 1, 20Y1; interest payment dates are May 1 and November 1. Assume the sale of the bonds is to be recorded in a manner that will recognize a value related to the conversion feature. The estimated sales price of the bonds without the conversion feature is 98.

July 1 Cash $$ Discounts on Bonds Payable $$ Bonds Payable $$ Paid-in Capital Arising from Bond Conversion Feature $$ Interest Payable $$