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

Cash	$ 31,000,000
Premium on Bonds		$    1,000,000
Bonds Payable		$ 30,000,000
Bonds Payable	$ 12,000,000
Premium on Bonds Payable (Calculation 1)	$       320,000
Common Stock, $10 Par (Calculation 2)		$       240,000
Paid in Capital in excess of Par		$ 12,080,000

Calculation 1
Premium on Bonds Payabe	1,000,000
Amortization fo 2015	100,000
Amortization fo 2016	100,000
Premium on Bonds Payable on January 2017	800,000
Bonds Converted	40%
Unamortized premium on bonds converted	320,000
Calculation 2
Conversion ratio = 6 share per 1000 Bond =(30000000/1000) x 2	60,000
Percentage of Bonds converted	40%
Number of Bonds issued	24,000
Par Value per share	10
Total Par Value	240,000