In: Accounting
(Show work and Calculations)
On January 1, 2016, when its $30 par value common stock was
selling for $80 per share, Bridgeport Corp. issued $11,900,000 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 $12,852,000. The present value of the bond payments at
the time of issuance was $10,115,000, 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
(b) Prepare the entry to record the exercise of the conversion option, using the book value method