Question

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.

Answer 1

Answer:

Date	Accounts	Debit	credit
2015
Jan-01	Cash	$        31,000,000
	Premium on bonds payable		$          1,000,000
	Bonds payable		$        30,000,000
2017
Jan-01	Bonds payable	$        12,000,000
	Premium on bonds payable	$              320,000
	common stock		$          2,160,000
	Additional Paid in capital		$        10,160,000
	Schedule 1
	Premium on bonds payable on Jan 1	$          1,000,000
	Amortization Year 1	$              100,000
	Amortization Year 2	$              100,000
	Premiu on bonds payable in year 2017	$              800,000
		40%
	Bonds converted	$              320,000
	Schedule 2
	No of bonds	30,000
	30000000/1000
	No of shares for each bond	6
	total	180,000
	stock split	3
		540,000
	Bonds converted	40%
	No of shares converted	216,000
	par	$                   10.00
	Par value	$    2,160,000.00

Comment