Question

On July 1, 2016, when its $1 par value common stock was selling for $66 per share, Indy Hotels Corp. issued $25,000,000 of 6% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into 10 shares of the corporation’s common stock. The debentures were issued for $26,500,000. The corporation believes the difference between the par value and the amount paid is attributable to the conversion feature. On January 1, 2017, the corporation’s 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 $0.50 par value common stock was selling for $38 per share, holders of 10,000 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 in general journal form the entry to record the original issuance of the convertible debentures.

(b) Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method. Show supporting computations in good form.

Answer 1

Ans (a)
	Journal entry for recording the original issuance of convertible debentures
		(In $)
		Debit	Credit
	July 1, 2016
	Bank Account	2,65,00,000
	To 6% Convertible debentures		2,50,00,000
	To Premium on issue of debentures (Conversion feature)		15,00,000
	(Being 6% convertible debentures issued of $ 25,000,000)
Ans (b)
	January 1, 2017
	Stock split = 2 stock for 1 stock
	New conversion rate = 2000 (1000*2) bonds for 10 shares of common stock
	January 1, 2018
	Journal entry to recording the exercise of the conversion option	(In $)
		Debit	Credit
	6% convertible debenture	10000
	To Common stock of Indy Hotels Corp.		25
	(10000*10/2000)*.50		9975
	To Premium on conversion of common stock
	( Being 6% convertible debenture of $ 10000 converted into 50 common stock of $ 0.50 (which is 50*.50=25) recorded at par and balance amount recorded as premium)