On 31-Dec-14 we made the following entry:

Interest Expense $27.36
Discount on Bond Payable ($2.83*5/6) $2.36 Interest Payable ($30*5/6) $25.00

This transaction was made when the share price was $6, but James had not elected to receive common stock as opposed to his usual $25.00 cash coupon. Now that Kat’s common stock price has jumped above $6 per share, James now elects to receive 5 shares of Kat common stock. This does not change the fact that there is a discount to amortize (i.e. the discount must be present as $960 was paid for the face value of $1000) Therefore we must continue to credit discount on bond payable according to the amortization table provided (1/6 now). Now however, we must record issuance of common stock. For common stock we usually get cash, but in this instance we are debiting an interest expense and interest payable (James now receives payment in form of face value) and credit the rest of the discount payable for the period and the common stock face value.

Record the issuance of common stock for coupon payment:

31-Jan-15
Interest Expense ($30.47-$25.00) $0.47 ($27.83-$27.36)
Additional Interest Paid Expense $5.00 (can be lumped together above in Int. Exp.)
Interest Payable $25.00 (reverse accrual for 2014)
Discount on Bond Payable (1/6*$2.83) $0.47
Common Stock (5*$6) $30.00

Because there is no change to the way interest expenses are calculated, Kat still incurs an interest expense as it did on the accrual entry for 31-Dec-14 (1/6 of interest for period). For simplicity I assumed the common stock issued was not treasury stock (reacquired at a cost) and the face value equals market value.

The interest expenses incurred are already calculated using the effective rate, i.e. the beginning bond liability times 2.9% equals the interest expense incurred. Therefore I believe that interest expenses incurred