Question

On January 1, 2019, when its $30 par value common stock was selling for $80 per share, Wildhorse Corp. issued $11,300,000 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 $12,204,000. The present value of the bond payments at the time of issuance was $9,605,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2020, 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, 2021, 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
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

(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
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Answer 1

Answer:

(a)

No	General Journal	Debit	Credit
a	Cash	12,204,000
	Bonds Payable		11,300,000
	Premium on Bonds Payable		904,000
	To record the issuance of convertible debentures

(b)

No	General Journal	Debit	Credit
b	Bonds Payable	3,390,000
	Premium on Bonds Payable	244,080
	Common Stock		508,500
	Paid-in Capital in Excess of Par—Common Stock		3,125,580
	To record exercise of conversion option using the book value method

Calculation:

(a).

Here we need to prepare the entry to record the original issuance of the convertible debentures.

When the convertible debentures are issued, the cash is received. So we need to debit the cash account.

The cash received = 12,204,000

Here we are recording issuance of $11,300,000 of 8% convertible debentures for $12,204,000. So the actual value of the bonds payable need to be credit as the debentures are issued.

The difference is the Premium on Bonds Payable which is credited.

Premium on Bonds Payable = 12,204,000 - 11,300,000 = 904,000

(b).

Here we need to prepare the entry to record the exercise of the conversion option, using the book value method.

So first we need to do the computation of Unamortized Premium on Bonds Converted. For that we need to deduct the two year amortizaion from the premium on bonds converted. And then multiply the Premium on bonds payable on January 1, 2021 with the % of bonds converted.

Premium on bonds payable on January 1, 2019		904,000
Amortization for 2019 ($904,000 ÷ 20)	45,200
Amortization for 2020 ($904,000 ÷ 20)	45,200	90,400
Premium on bonds payable on January 1, 2021		813,600
Bonds converted		30%
Unamortized premium on bonds converted		244,080

The Premium on Bonds Payable of 244,080 need to be debited.

Then we need to compute the Common Stock Resulting from Conversion.

For that we need to find the Number of bonds and multiply with the Number of shares for each bond. Then need to multiply with the stock split number.

Then we need to multiply the Number of shares convertible after the stock split with the % of bonds converted to get the Number of shares issued. Need to multiply the per share par value with that to get the total par value which need to be credited with the Common Stock account.

Number of shares convertible on January 1, 2019:
Number of bonds ($11,300,000 ÷ $1,000)	11,300
Number of shares for each bond	x 5	56,500
Stock split on January 1, 2020		2
Number of shares convertible after the stock split		113,000
% of bonds converted	x	30%
Number of shares issued		33,900
Par value per share	x	15
Total par value		508,500

Here the value of the bonds payable will be  11,300,000 x 30% = 3,390,000