Purpose: (L.O. 6) This exercise will illustrate how to account for (1) the redemption of bonds by cash payment prior to maturity, and (2) the conversion of bonds to stock.
The balance sheet for Sea Willy Corporation reports the following information on June 30, 2014:
A semiannual interest payment was made and recorded on June 30, 2014.
Prepare the appropriate journal entry for each of the independent situations below:
- Interest rates have declined in the market place. Sea Willy decides to borrow money from another source at a lower interest rate to lower its annual interest charges. Therefore, on July 1, 2014, Sea Willy redeems all of the outstanding bonds at 102 (bond prices vary inversely with changes in the market rate of interest).
- Holders of one-half of the bonds exercise the conversion feature. Thus, each of 500 bonds is converted into 12 shares of Sea Willy $50 par common stock on July 1, 2014. At this date, the market price of a bond was $984 and the market value of a share of stock was $82.