Question

Exercise 16-4

On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Carla Corp. issued $12,000,000 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 $12,960,000. The present value of the bond payments at the time of issuance was $10,200,000, 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. (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.)

Account Titles and Explanation
Debit
Credit

(b) Prepare the entry to record the exercise of the conversion option, 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.)

Account Titles and Explanation
Debit
Credit

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Answer 1

(a)	Cash	$12,960,000
	Bonds Payable		$12,000,000
	Premium on Bonds Payable		$960,000
	(To record issuance of $12,000,000 of 8% convertible debentures for $12,960,000. The bonds matur in twenty years, and each $1,000 bond is convertible into five shares of $30 par value common stock)
(b)	Bonds Payable	$3,600,000
	Premium on Bonds Payable	$259,200
	Common Stock, $15 par		$540,000
	Paid-in Capital in Excess of Par		$3,319,200
	(To record conversion of 30% of the outstanding 8% convertible debentures after giving effectto the 2-for-1 stock split)
	Working
1	Computation of Unamortized Premium on Bonds Converted
	Premium on bonds payable on January 1, 2016		$960,000
	Amortization for 2016 ($960,000/20)	$48,000
	Amortization for 2017	$48,000	$96,000
	Premium on bonds payable on January 1, 2018		$864,000
	Bonds converted		30.00%
	Unamortized premium on bonds converted		$259,200
2	Computation of Common Stock Resulting from Conversion
	Number of shares convertible on January 1, 2016
	Number of bonds ($12,000,000 / $1,000)	12,000
	Number of shares for each bond	5	60,000
	Stock split on January 1, 2017		2
	Number of shares convertible after the stock split		120,000
	% of bonds converted		30.00%
	Number of shares issued		36,000
	Par value/per share		$15
	Total Par Value		$540,000