Lal Corporation issued $9,000,000 of 7%, ten-year convertible bonds on July 1, 2004 at 96.1 plus accrued interest. The bonds were dated April 1, 2004 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2005, $1,800,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

 If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2004?

 a. $193,500.

 b. $202,500.

 c. $211,500.

 d. $405,000.

Answer is B

I am afraid that none of these answers seem correct :(

I would calculate it as:

Interest expense from April 1 2004 to October 1, 2004 using the stated interest: 9000000*0.07*6/12= 315,000. This is also the cash interest that should be paid on October 1, 2004.

The discount is 9,000,000-8,649,000=351,000

Under SL amortization it is 351,000/10=35,100 annual amortization.

The amortization should be calculated from the issuance date i.e. July 1, 2004. 35,100*3/12=8,775.

Amortization should be added to the cash intrerest payable to get the interest expense, so 315,000+8775=323,775.

If everyone has a better idea, pls share it. I'm lost with these questions

hmmmm, there is a issue with this question :-

cinnamon, you calculated the discount correctly, that is, $351000

However, we amortize the discount from the date when they were sold - July 1, 2004. The amortization period would be 117 months (July 1 , 2004 till April 1, 2014).

Thus, amortization from July 1 - Oct 1 = 351,000x3/117 = $9,000

The interest payable is $315,000, however, it would be set off against accrued interest of $157,500 for 3 months April 1 till July 1 received at the time when bonds were sold, isn't it?

Thus, interest expense should be  = 315,000 - 157,500 + 9,000 = $166,500

which does not match with any of the answers ??? What am I missing?

Anyone ??

Maybe like that

351,000-157,500+9000=$202,500

Divya, you are right. I think that the amortization of discount is indeed 9,000 (I wrote that amortization starts from the bond issuance date, i.e. July 1, 2004 but forgot to take into account the fact that in 10 years from July 1, 2004 the bond will already have expired-since it is dated April 1,2004, it will expire on April 1,2014, so the amortization period is less than 10 years). Regarding accrued interest I think that you are also right. The initial entry would have been:

DR CASH 8,806,500

DR DISCOUNT 351,000

CR BOND PAYABLE 9,000,000

CR ACCRUED INTEREST 157,500

Taxygood I don't think that the discount of 351,000 byitself is an interest expense account,it adds to intrest expense when it is amorized. At inception it is a contra-liability account. So the correct answer would be 315,000+9,000-157,500.