Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On May 3 1 , 2 0 2 2 alfer the semi - annual interest payment was made, Guft Corp. had the following information available

On May 31,2022 alfer the semi-annual interest payment was made, Guft Corp. had the following information available regarding its convertble bonds:
. $3,000,000 of convertible bonds outstanding.
The bonds pay 7% inlerest semiannually on the last days of May and November.
Each $1,000 bond is convertible into 29 common shares with no par value.
On May 31,2022, $66,000 of bonds were converted.
Market value of the bonds on conversion date was 109.
Market price of the common shares on conversion date was $34.
Carrying value of the common shares on conversion date was $17.
The Contribuled surplus - convertiole bonds options account had a balance of $480,000.
The total unamortized premium on May 31,2022 was $264,000.
The remainder of the bonds were retired at maturity having never been converted.
Gulf Corp. uses the book value method to record comersion and amortization of premium.
Gulf Corp. uses the residual method to value and record the debt and equity components of the convertible debt when it was issued.
Enter an appropriate description when entering the transactions in the journal. Dates must be entered in the format dd/mmm (ie. January 15 would be 15? Jan). Please make sure your final answer(s) are accurate
to 2 decimal places.
a) Prepare the journal entry on May 31,2022 to record bond conversion.
Marking:
'Bonds payable' should be debited for the amount of $71,808, but you have not done this. This will cost you 1 mark.
Face value of bond converted
$3,000,000
Premium as of May 31,2022 for $3,000,000 of bonds $264.000
Carrying value of bond corverted $3,264,000
Bonds payable =$66,000$3,000,000$3,264,000=$71,808
You have not included the 'Contributed surplus - corvertble bonds options' account in this joumal entry. This will cost you 2 marks.
You have not included the 'Common shares' account in this joumal entry. This will cost you 2 marks.
'Cash' should not have been included in this joumal entry. Any amounts entered for this account will not be evaluated.
b) Assume now that in addition to the data presented in part a), that Gulf Corp. included an additional sweetener of $15,000 cash at the time of conversion. Prepare the journal entry to record the
bond conversion.
Marking:
'Bonds payable' should be debited for the amount of $71,808, but you have not done this. This will cost you 1 mark.
You have not included the 'Contributed surplus - corverfible bonds options' account in this joumal entry. This will cost you 2 marks.
You have not included the 'Loss on redemption of bonds' account in this joumal entry. This will cost you 2 marks.
You have not included the 'Retained eamings' account in this joumal entry. This will cost you 2 marks.
You have not included the 'Common shares' account in this joumal entry. This will cost you 2 marks.
'Cash' should be credited for the amount of $15,000, but you have not done this. This will cost you 1 mark.
c) Prepare the entry at maturity to retire the remaining bonds, assuming the final interest payment has been made and the maturity date is May 31.
Marking:
You have not included the 'Contributed surplus - comvertble bonds options' account in this joumal entry. This will cost you 2 marks.
'Cash' should be credited for the amount of $2,934,000, but you have not done this. This will cost you 1 mark.
You have not included the 'Contributed surplus - expired options' account in this journal entry. This will cost you 2 marks.
'Insurance expense' should not have been included in this journal entry. Ary amounts entered for this account will not be evaluated.
Note: Bonds payable and cash are recorded at the remaining face value of the bonds because the final interest payment has been made, and therefore the discoundpremium has been amortized complelely.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting Theory And Analysis Text And Cases

Authors: Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey

9th Edition

9780470128817

More Books

Students also viewed these Accounting questions

Question

=+e. Storytelling present product in a story.

Answered: 1 week ago