question archive On January 1, 2015, when its $30 par value common stock was selling for $80 per share, a corporation issued $30 million of 10% convertible debentures due in 10 years
On January 1, 2015, when its $30 par value common stock was selling for $80 per share, a corporation issued $30 million of 10% convertible debentures due in 10 years
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On January 1, 2015, when its $30 par value common stock was selling for $80 per share, a corporation issued $30 million of 10% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert it into six shares of the corporation’s $30 par value common stock. The debentures were issued for $31 million. At the time of issuance, the present value of the bond payments was $28.50 million, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2016, the corporation’s $30 par value common stock was split 3 for 1. On January 1, 2017, when the corporation’s $10 par value common stock was selling for $90 per share, holders of 40% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums.
Required:
| 1. | Prepare the journal entry to record the original issuance of the convertible debentures. |
| 2. | Prepare the journal entry to record the exercise of the conversion option, using the book value method. |
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Answer:
| Cash | $ 31,000,000 | |
| Premium on Bonds | $ 1,000,000 | |
| Bonds Payable | $ 30,000,000 | |
| Bonds Payable | $ 12,000,000 | |
| Premium on Bonds Payable (Calculation 1) | $ 320,000 | |
| Common Stock, $10 Par (Calculation 2) | $ 240,000 | |
| Paid in Capital in excess of Par | $ 12,080,000 |
| Calculation 1 | |
| Premium on Bonds Payabe | 1,000,000 |
| Amortization fo 2015 | 100,000 |
| Amortization fo 2016 | 100,000 |
| Premium on Bonds Payable on January 2017 | 800,000 |
| Bonds Converted | 40% |
| Unamortized premium on bonds converted | 320,000 |
| Calculation 2 | |
| Conversion ratio = 6 share per 1000 Bond =(30000000/1000) x 2 | 60,000 |
| Percentage of Bonds converted | 40% |
| Number of Bonds issued | 24,000 |
| Par Value per share | 10 |
| Total Par Value | 240,000 |
