Question

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

1.		Crane Corp. issued $21,700,000 par value 10% convertible bonds at 97. If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at 95.
2.		Cheyenne Company issued $21,700,000 par value 10% bonds at 96. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $5.
3.		Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the transaction. The 11%, $10,200,000 par value bonds were converted into 1,020,000 shares of $1 par value common stock on July 1, 2017. On July 1, there was $52,000 of unamortized discount applicable to the bonds, and the company paid an additional $73,000 to the bondholders to induce conversion of all the bonds. The company records the conversion 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.)

No.	Account Titles and Explanation	Debit	Credit
1.
2.
3.

Answer 1

1) In this case bonds have been issued at a discount. The par value of bonds is $100. So the issuance of bonds have been journalized as:

Account Title	Debit	Credit
Cash {21,700,000 * (97/100)}	$21,049,000
Discount on Bonds Payable	$651,000
To Bonds Payable		$21,700,000
(Being Bonds Issued)

2) In this scenario the value of bonds and the value of warrants are to be computed wherein the value are computed below. The par value of bonds is $100.

value of bonds = 21,700,000 * 96/100

= $20,832,000

Value of warrants = (21,700,000 / 100) * 5

= $1,085,000

Total value of bonds including warrants = 20,832,000 + 1,085,000

= $21,917,000

Account Title	Debit	Credit
Cash {21,700,000 * (96/100)}	$20,832,000
Discounts on Bonds Payable	$1,953,000
To Bonds Payable		$21,700,000
To paid in capital share warrants		$1,085,000
(Being bonds issued)

3)

Account Title	Debit	Credit
Debt Conversion Expense	$73,000
Bonds Payable	$10,200,000
To Discount on bonds		$52,000
To common stock		$1,020,000
To paid in capital in excess of common stock (Bal. Figure)		$9,128,000

To Cash		$73,000
(Being Debt conversion done)

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