Question

For each of the unrelated transactions described below, present the entries required to record each transaction. 

1. Concord Corp. issued $19,900,000 par value 9% convertible bonds at 99. If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at 95. 

2. Hoosier Company issued $20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $4. 

3. Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the transaction. The 11%, $10,000,000 par value bonds were converted into 1,000,000 shares of $1 par value common stock on July 1, 2017. On July 1, there was $55,000 of unamortized discount applicable to the bonds, and the company paid an additional $75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

Answer 1

The question consists of three unrelated transactions. We have to prepare Journal entries for each transactions seperately .

step 1 :

1. Concord Corp. issued the bonds of $19,900,000 par value 9% convertible bonds bonds at $99.The Journal entry to record this transaction is given below.

 

1.	Particulars	Debit	Credit
	Cash A/c	19701000
	Discount on Bonds Payable	199000
	Bonds Payable		19900000

                    [ To record the issuance of Bonds ]

 

   Working note :

    1. Cash = $19,900,000 x 0.99 = $19,701,000

    2. Discount on Bonds Payable = $ 19,900,000 x 0.01 = $ 1,99,000.

   

Step 2:

      Journal Entry in the books of Hoosier Company 

2	Particulars	Debit	Credit
	Cash	19600000
	Discount on Bonds Payable	1200000
	Bonds Payable		20000000
	Paid in capital- stock warrant		800000

               [ To record issuance of Bonds with stock Warrants ]

 

Working Note :

1. Cash = $20,000,000 x 0.98 = $19,600,000

2. Discount On Bonds Payable = $20,000,000 x 0.02 + 2,00,000 (bonds) x 4 (Warrant)

                                                       = $4,00,000 +$ 8,00,000

                                                       = $ 12,00,000

3. Value of the Bond plus warrants  = $19,600,000 

    Value of Warrants ( 2,00,000 x 4 ) = $ 8,00,000

                                                                   --------------------

 Value of Bonds                                       $ 18,800,000

                                                                  ---------------------

 

Step 3:

            Journal Entry in the books of Sepracor Inc.

3	Particulars	Debit	Credit
	Bond Payable	10000000
	Debt Conversion Expense	75000
	Discount on Bonds Payable		55000
	Common Stock		1000000
	Paid in Capital in excess of par		8945000
	Cash		75000

 

Working Note :

1. Paid in Capital in excess of par -Common Stock

                                       = Bonds Payable-Discount on Bonds Payable - Common Stock

                                        = $10,000,000 - $1,000,000 - $55,000

                                        = $ 8,945,000

When Bonds/Debentures are issued ,the company receives the Cash from the Bond holders/debenture holders .