Question

In: Accounting

On January 1, 2019, Garner issued 10-year, $200,000

On January 1, 2019, Garner issued 10-year, $200,000 face value, 6% bonds at par. Each $1,000 bond is convertible into 30 shares of Garner $2 par value common stock. The company has had 10,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2020. (Ignore all tax effects.)

Requirement 1: Accounting

Prepare the journal entry Garner would have made on January 1, 2019, to record the issuance of the bonds.

Garner’s net income in 2020 was $30,000 and was $27,000 in 2019. Compute basic and diluted earnings per share for Garner for 2020 and 2019.

Assume that 75% of the holders of Garner’s convertible bonds convert their bonds to stock on June 30, 2021, when Garner’s stock is trading at $32 per share. Garner pays $50 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.

Expert Solution

(a) Journal entry for issue of bonds

2019

January 1

Bank a/c Dr

To 6% bonds payable

$200,000

(b)

2020

2019

Earnings

$30,000

$27,000

No of Shares

10000

Basic EPS

(earning/no. of shares above)

$3

$2.7

No of shares on conversion of bonds into equity

Existing shares

10000

Converted shares

6000

200,000/1000*30

No of shares

16000

Diluted EPS

(earning/no. of shares above)

1.875

1.6875

(c) 75% of the convertible bonds = 200,000/1000 * 75%

= 150 bonds

converted into = 150 * 30 shares

= 4500 shares

existing shares = 10000 shares

total shares after conversion = 14,500 shares

face value of converted shares = 4500*2 = $9000

share premium = (32-2) * 4500

= $135,000

Journal entry

June 30, 2021

6% convertible bond a/c Dr.

To share cap

To share premium

To profit & loss

$150,000

$9,000

$135,000

$6,000

Basic EPS = $3 , $2.7

Diluted EPS = 1.875, 1.6875

S Mahalaxmi answered 2 years ago

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