Question

On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Novak Corp. issued $10,400,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the corporation’s common stock. The debentures were issued for $11,232,000. The present value of the bond payments at the time of issuance was $8,840,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, the corporation’s $30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2018, when the corporation’s $15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercised their conversion options. The corporation 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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

(b) Prepare the entry to record the exercise of the conversion option, using the book value method. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Answer 1

Solution-

S.No.	Account Titles and Explanation	Debit ($)	Credit ($)
1.	Cash	11,232,000
	Bonds Payable		10,400,000
	Premium on Bonds Payable		832,000
	(To record issuance of $10,400,000 of 8% convertible debentures for $11,232,000)
2.	Bonds Payable(31,200*100)	3,120,000
	Premium on Bonds Payable (Schedule 1)	224,640
	Common Stock, $15 par (Schedule 2)		468,000
	Paid-in Capital in Excess of Par		2,876,640
	(To record conversion of 30% of the outstanding 8% convertible debentures after giving effect to the 2-for-1 stock split)

Schedule 1- Computation of Unamortized Premium on Bonds Converted

Particulars	Amount ($)	Amount ($)
Premium on bonds payable on January 1, 2016		832,000
Amortization for 2016 ($832,000 / 20)	41,600
Amortization for 2017 ($832,000 / 20)	41,600	83,200
Premium on bonds payable on January 1, 2018		748,800
Bonds converted		30%
Unamortized premium on bonds converted		224,640

Schedule 2- Computation of Common Stock Resulting from Conversion

Particulars	Amount ($)	Amount ($)
Number of shares convertible on January 1, 2016:
Number of bonds ($10,400,000 / $1,000)	10,400
Number of shares for each bond	5	52,000 (10,400*5)
Stock split on January 1, 2017		2
Number of shares convertible after the stock split		104,000
% of bonds converted		30%
Number of shares issued		31,200
Par value per share		$15
Total par value		468,000