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On January 1, 2016, when its $30 par value common stock was selling for $80 per...

On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Monty Corp. issued $11,100,000 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 $11,988,000. The present value of the bond payments at the time of issuance was $9,435,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, 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, 2018, 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 exercise of the conversion option, using the book value method.

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General Journal Debit Credit
Bonds payable 3330000
Premium on bonds payable (Schedule 1) 239760
Common Stock (Schedule 2) 499500
Paid-in Capital in Excess of Par— Common Stock. 3070260
(To record conversion of 30% of the outstanding 8% convertible debentures after giving effect to the 2-for-1 stock split)
Schedule 1
Computation of Unamortized Premium on Bonds Converted
Premium on bonds payable on January 1, 2016 888000
(11988000-11100000)
Amortization for 2016 ($888,000 ÷ 20). 44400
Amortization for 2017 ($888,000 ÷ 20). 44400 88800
Premium on bonds payable on January 1, 2018 799200
Bonds converted * 30% X 30%
Unamortized premium on bonds converted 239760
Schedule 2
Computation of Common Stock Resulting from Conversion
Number of shares convertible on January 1, 2016
Number of bonds (11100000/1000) 11100
Number of shares for each bond 5 55500
Stock split on January 1, 2017 2
Number of shares convertible after the stock split. 111000
% of bonds converted. 30%
Number of shares issued 33300
Par value/per share 15
Total Par Value 499500

ekkarill92 answered 10 months ago
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