Question

(Conversion of Bonds) On January 1, 2010, when its $30 par value common stock was selling for $80 per share, Bartz Corp. issued $10,000,000 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 $10,600,000. The present value of the bond payments at the time of issuance was $8,500,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2011, 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, 2012, when the corporation’s $15 par value common stock was selling for $135 per share, holders of 20% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums.

Instructions

(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. Show supporting computations in good form.

Answer 1

	S.No.	Account titles and Explanations	Debit $	Credit $
	a.)	Cash	10,600,000
		Bonds Payable		10,000,000
		Premium on Bonds Payable		600,000
		(To record issuance of covertible debentures)
	b.)	Bonds Payable ( 10,000,000 x 20% )	2,000,000
		Premium on Bonds Payable (Working 1)	108,000
		Common Stock, $15 par (Working 2)		300,000
		Paid-in Capital in Excess of Par		1,808,000
		(To record exercise of conversion option)

	Working-1
	Particulars	Amount ($)
	Premium on bonds payable on January 1, 2010	600,000
	Less :Amortization for 2010 (600,000 / 20)	30,000
	Less: Amortization for 2011 (600,000 / 20)	30,000
	Premium on bonds payable on January 1, 2012	540,000
	Bonds converted	20%
	Unamortized premium on bonds converted	108,000
	Working-2
	Number of shares convertible on January 1, 2010:
	Number of bonds (10,000,000 / 1,000)	10,000
	Number of shares to be issued for bond	50,000	( 10,000 x 5 )
	Stock split on January 1, 2011	2
	Number of shares convertible after the stock split	100,000
	% of bonds converted	20%
	Number of shares issued	20,000
	Par value per share $	15
	Total par value $	300,000