Question

Bradley-Link’s December 31, 2018, balance sheet included the following items:

Long-Term Liabilities	($ in millions)
10.0% convertible bonds, callable at 103 beginning in 2019, due 2022 (net of unamortized discount of $5) [note 8]	$195
11.0% registered bonds callable at 106 beginning in 2028, due 2032 (net of unamortized discount of $2) [note 8]	63
Shareholders’ Equity	5
Equity—stock warrants

Note 8: Bonds (in part)
The 10.0% bonds were issued in 2005 at 97.5 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of the Company’s no par common stock.

The 11.0% bonds were issued in 2009 at 104 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitles the holder to purchase one share of the Company’s no par common stock for $20, beginning 2019.

On January 3, 2019, when Bradley-Link’s common stock had a market price of $27 per share, Bradley-Link called the convertible bonds to force conversion. 90% were converted; the remainder were acquired at the call price. When the common stock price reached an all-time high of $32 in December of 2019, 40% of the warrants were exercised.

Required:
1. Prepare the journal entries that were recorded when each of the two bond issues was originally sold in 2005 and 2009.
2. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019 and the retirement of the remainder.
3. Assume Bradley-Link induced conversion by offering $160 cash for each bond converted. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019.
4. Assume Bradley-Link induced conversion by modifying the conversion ratio to exchange 45 shares for each bond rather than the 40 shares provided in the contract. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019.
5. Prepare the journal entry to record the exercise of the warrants in December 2019.

Answer 1

1. The journal entries that were recorded when each of the two bonds issued
was originally sold in 2005 and 2009
	General Journal	Debit	Credit
1	Cash	195
	Discount on Bonds Payable	5
	Convertible Bonds Payable		200
2	Cash	67.6
	Discount on Bonds Payable	2.4
	Convertible bonds payable		65
	Stock warrant		5
2.The journal entry to record conversion of 90% of the convertible bonds in
Jan 2019 and retirement of the remainder
	General Journal	Debit	Credit
1	Convertible Bonds Payable	180
	Discount on Bonds Payable		4.5
	Common Stock		175.5
2	Convertible Bonds Payable	20
	Loss on early retirement	1.1
	Discount on Bonds Payable		0.5
	Cash		20.6
Working Note:
Cash = 200000 bonds x $103 per bond
= $20.6 million
3. Assume Bradley-Link induced conversion by offering $160 cash for each bond converted.
The journal entry to record conversion of 90% of the convertible bonds in
Jan 2019 and retirement of the remainder
	General Journal	Debit	Credit
1	Convertible Bonds Payable	180
	Conversion Cost	28.8
	Discount on Bonds Payable		4.5
	Common Stock		175.5
	Cash		28.8
Working Note:
Conversion cost = $160 x 180000 bonds
= $28.8 million
4. Assume Bradley-link induced conversion by modifying the conversion ratio to 45 shares
for each bond rather than 40 shares provided in the contract.
The journal entry to record conversion of 90% of the convertible bonds in
Jan 2019 and retirement of the remainder
	General Journal	Debit	Credit
1	Convertible Bonds Payable	180
	Conversion Cost	24.3
	Discount on Bonds Payable		4.5
	Common Stock		199.8
Working Note:
Conversion cost = 5 shares x $27 per share x 180000 bonds
= $24.3 million
5.The journal entry to record the exercise of the warrant in Jan, 2019
	General Journal	Debit	Credit
1	Cash	26
	Equity Stock-warrant	2
	Common Stock		28
Working Note:
Cash = Bonds payable x 40%
= 65 x 40% = 26
Stock Warrant = 5 x 40% = 2