Question

On January 1st 2015 when it's $30 per share common stock was selling for $60 per share a corporation issued $30 million of 12% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert it into six shares I'd the corporations $30 per value common stock. The debentures were issued for $31 million. At the time of issuance the present value of the bond payments was $28.50 million, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. In January 1, 2016, the corporations $30 par value common stock was split 3 for 1. On January 1, 2017, when the corporations $10 par value common stock was selling for $70 per share, holders of 40% of the convertible debentures exercised their conversion options. The corporation uses the straight line method for amortizing any bond discounts or premiums.

Prepare the journal entries to record the original issuance of the convertible debentures

Prepare the journal entry to record the exercise of the conversion option, using the book value method

Answer 1

1) Journal Entry :-

Date	Particulars	Debit($)	Credit($)
	Cash	31000000
	Bonds Payable		30000000
	Premium on Bonds Payable		1000000
	(Being Record Issuance of $30000000 of 12% Convertible Debentures for $31000000.)

2) Journal Entry :-

Date	Particulars	Debit($)	Credit($)
	Bonds Payable ($30000000 * 40%)	12000000
	Premium on Bonds Payable	320000
	Common Stock		2160000
	Paid in Capital Excess of Par		10160000
	(Being Record Conversion of 40% of 12% Convertible debentures after Stock Split)

Working Note :-

1) Premium on Bonds Payable :-

Particulars	Amount($)
Premium on Bonds Payable on Jan. 1, 2015	1000000
Less : Amortization for 2015 ($1000000/10)	(100000)
Less : Amortization for 2016 ($1000000/10)	(100000)
Premium on Bonds Payable on Jan. 1, 2017	800000
Bonds Converted Rate	40%
Unamortized Premium on Bonds Converted	320000

2) Common Stock :-

No. of Shares Convertible = No. of Bonds * No. of Shares for Each Bond

= ($30000000/$1000) * 6

= 180000 shares

No. of Shares convertible after Stock Split :-

= 180000 * 3

= 540000 shares

No. of Shares Issued = No. of Shares convertible after Stock Split * % of Bonds Converted

= 540000 * 40%

= 216000

Total Issue Price = 216000 * $10 = 2160000