question archive On January 1, 2020, when the fair value of its common shares was $86 per share, Sunland Corp
On January 1, 2020, when the fair value of its common shares was $86 per share, Sunland Corp
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On January 1, 2020, when the fair value of its common shares was $86 per share, Sunland Corp. issued $11 million of 7% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into 4 common shares. The debentures were issued for $11.9 million. The bond payment's present value at the time of issuance was $9.4 million and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2021, the corporation's common shares were split 3 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2022, when the fair value of the corporation's common shares was $121 per share, holders of 25% of the convertible debentures exercised their conversion option. Sunland Corp. applies ASPE, and uses the straight-line method for amortizing any bond discounts or premiums.
a. Prepare the entry to record the original issuance of the convertible debentures.
b. Using the book value method, prepare the entry to record the exercise of the conversion option. Show supporting calculations in good form.
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Journal Entry
Dr Cr
a)
Cash 11900000
Premium on bonds payable 900000
Bonds payable 11000000
b)
Bonds payable 2750000
Premium on bonds payable 202500
Common stock 330000
Paid in capital in excess of par 2622500
Step-by-step explanation
25% Bonds converted into shares = 1100000 * 25% = 2750000
Number of shares to be issued = (2750000 / 1000) * 4 * 3 = 33000
Unamortized premium on Bonds = (900000 * 25%) * 18 / 20 = 202500
Assumed the Face Value of Stock to be 10.
