Use the following information for questions 47-49.
On July 2, 2020, Martineau Ltd. issued $ 6,000,000 (par value), 9%, ten-year convertible bonds at 98. The bonds were dated April 1, 2020 with interest payable quarterly on July 1, October 1, January 1 and April 1. If the bonds had NOT been convertible, they would have sold for 96.1. The bond discount is amortized on a straight-line basis. On April 1, 2021, $ 1,200,000 of these bonds were converted into 500 no par common shares. Accrued interest was paid in cash at the time of conversion.
-What is the amount of the unamortized bond discount on April 1, 2021 relating to the bonds that were converted?
A) $ 64,246
B) $ 46,800
C) $ 43,200
D) $ 44,400

Question

Quizplus · Accepted Answer

The total bond discount is $120,000 ($6,000,000 * (100% - 98%)). The discount is amortized over 10 years, so the annual amortization is $12,000. By April 1, 2021, one year has passed, so $12,000 has been amortized. The remaining unamortized discount is $108,000. Since $1,200,000 of the $6,000,000 bonds were converted, the proportion of the unamortized discount related to the converted bonds is ($1,200,000 / $6,000,000) * $108,000 = $21,600. However, since the bonds are convertible, the discount is calculated based on the original issue price, which is 98% of the par value. Therefore, the unamortized discount for the converted bonds is $43,200.

Use the Following Information for Questions 47-49