Sometimes investors convert bonds to stock in a company. What kind of bond allows this exchange and what might be a reason for an investor to make the switch? If Bunny Ears were to issue ten bonds of $1,000.00 at an 8% coupon rate, how might the journal entries above change? Explain your reasoning.

 

Convertible bonds are a type of compound financial instrument which gives the holder a right to convert bonds into shares. Over time, the issuer's stocks might have become more attractive to investors (usually an increase in earnings-per-share) and this might opt the holder of convertible bonds to exercise the right. To them, the return from the stock investment might be more promising than receiving the cash owed to them.

In the case of Bunny Ears, if such bonds contain conversion privilege, the journal entry would be:

Dr. Cash                                                            xx

              Cr. Bonds Payable                                                         xx

              Cr. Share Premium - conversion privilege              xx

The amount that would be receive from the issuance of convertible bonds would include the right to conversion. This right must be recorded upon receipt of cash and presented under Share Premium. If exercised, this share premium will be considered as an additional consideration made by the investor.

(The data regarding amounts is incomplete and therefore, I cannot provide the numbers in the journal entry.)