Question

Fixzit had issued 7,200 convertible bonds at 121 on January 1, 2016. The $1,000 par value bonds carried an interest rate of 7% and had a 10-year term. Interest was to be paid by the company on June 30 and December 31. Attached with each bond were twenty detachable warrants, also issued.

Each warrant entitled the holder to purchase one share from Fixzit at a price of $54. Further, each bond was convertible, at the option of the holder, into 32 common shares. The underwriter informed the company that the bonds alone, excluding warrants and conversion rights, could be issued in the market at a 6.5% premium. Similar warrants were being traded at a market value of $4 each at the date of issue. You have been asked to view this situation on the assumption that the company uses ASPE for its accounts and amortizes the bonds using straight line.

REQUIRED:

1. a] Prepare the appropriate journal entry to record the issue of these bonds without crediting the full amount received to liability (residual equity method).

2. b] Prepare an appropriate journal entry to record the interest expense on December 31, 2016.

3. c] On July 1, 2018, 65% of the warrants outstanding were exercised by the warrant holders. The company’s shares were being traded in the market at a price of $62 each on that day. Prepare an appropriate journal entry to record this transaction.

4. d] On July 1, 2019, 60% of the bondholders submitted their respective bonds for conversion. The company’s shares were being traded at $68 on that day. The company had duly recorded and paid off all interest accrued and due on the bonds up to June 30, 2019. Prepare the appropriate journal entry, using the book value method, to record the conversion of the bonds.

5. e] How many shares would have been issued from the bond conversion of July 1, 2019?

Answer 1

A . Prepare the appropriate journal entry to record the issue of these bonds

.

Par value of the bonds (7200*1000)	7200000
Issue pnq	1.21
proceeds	8712000
Fair value of the debt component(7200*1000*1.065)	7668000
Fair value of equity component	1044000
Excess allocated as follows
Share option outstanding(7200*20*4)	576000
Conversion privilege	468000
Total	1044000

Journal entry

Cash	$ 8712000
Bond payable   Premium on bond payable   Share warrants outstanding   Share premium conversion privilege	$ 7200000            468000            576000            468000

B. Prepare an appropriate journal entry to record the interest expense on December 31, 2016.

.

Interest expense

.

Interest expense	504000
cash	504000
(to record interest paid , 7200000 * 7%)
Premium on bonds payable	46800
Interest expense	46800
(to record straight line amount of premium , 468000 / 10)

May be compounded

Interest expense Premium on bonds payable	457200 46800
cash	50400

C. Exercise of 65% warrants

.

Bonds issued	7200
Warrants per bond	20
Total warrants available	144000
Exercised	65%
Warrants exercised	93600

Journal entry

Cash (at exercise price) Share warrants outstanding(576000*65%)	5054400 374400
Share capital	5428800

The par value of shares appears to be missing hence the total amount is lumped to share capital

.

D. conversion of 60% bonds

.

Par value of the bond		7200000
Add ; premium on bond payable 1/1/16 Amortization up to July 1 2019 [(468000/10)*3.5]	468000 (163800)	304200
Carrying amount		7504200

.

Journal entry

.

Bonds payable (7200000*60%) Premium on bonds payable (304200*60%) Share premium conversion	4320000 182520 280800
Share capital	4783320

.

E. How many shares would have been issued from the bond conversion of July 1, 2019?

Bonds converted (7200*60%)	4320
Share per bond	32
Bond converted	138240