On January 1, 2019, Famous Company issued a convertible bond with par value of $50,000 in themarket for $62,000. The bonds are convertible into 5,000 ordinary shares of $2 per share parvalue. The bond has 5 years life and has a stated interest rate of 10% payable annually. The marketinterest rate for a similar non-convertible bond at January 1, 2019 is 8%. The liability componentof the bond is computed to $53,000. The following bond amortization schedule I provided for thisbond. Date Cash Paid Income Expense PremiumAmortizedCarrying Amountof Bonds1/1/19 53,99312/31/19 5,000 4,319 681 53,31212/31/20 5,000 4,265 735 52,57712/31/21 5,000 4,206 794 51,78312/31/22 5,000 4,143 857 50,92612/31/23 5,000 4,074 926 50,000Instructions:a. Prepare journal entry to record the issuance of convertible bonds on January 1, 2019b. Prepare the journal entry to record the payment of interest on December 31, 2020c. Assume that the bonds were converted on December 31, 2021. The fair value of the liabilitycomponent of the bond is determined o be $55,000 on December 31, 2021. Prepare thejournal entry to record the conversion. Assume that the accrual of interest related to 2021has been recorded.d. Assume that the convertible bonds were repurchased on December 31, 2021 for $56,000instead of being converted. As indicated, the liability component of the bond is determinedfor $42,300 on December 31, 2021. Prepare the journal entry to record the conversion.Assume that the accrual of interest related to 2021 has been recorded
On January 1, 2019, Famous Company issued a convertible bond with par value of $50,000 in the
market for $62,000. The bonds are convertible into 5,000 ordinary shares of $2 per share par
value. The bond has 5 years life and has a stated interest rate of 10% payable annually. The market
interest rate for a similar non-convertible bond at January 1, 2019 is 8%. The liability component
of the bond is computed to $53,000. The following bond amortization schedule I provided for this
bond.
Date Cash Paid Income Expense Premium
Amortized
Carrying Amount
of Bonds
1/1/19 53,993
12/31/19 5,000 4,319 681 53,312
12/31/20 5,000 4,265 735 52,577
12/31/21 5,000 4,206 794 51,783
12/31/22 5,000 4,143 857 50,926
12/31/23 5,000 4,074 926 50,000
Instructions:
a. Prepare
b. Prepare the journal entry to record the payment of interest on December 31, 2020
c. Assume that the bonds were converted on December 31, 2021. The fair value of the liability
component of the bond is determined o be $55,000 on December 31, 2021. Prepare the
journal entry to record the conversion. Assume that the accrual of interest related to 2021
has been recorded.
d. Assume that the convertible bonds were repurchased on December 31, 2021 for $56,000
instead of being converted. As indicated, the liability component of the bond is determined
for $42,300 on December 31, 2021. Prepare the journal entry to record the conversion.
Assume that the accrual of interest related to 2021 has been recorded
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