In: Accounting
Bradley-Link’s December 31, 2018, balance sheet included the
following items:
Long-Term Liabilities | ($ in millions) |
10.0%
convertible bonds, callable at 105 beginning in 2019, due 2022 (net of unamortized discount of $4) [note 8] |
$296 |
11.0% registered
bonds callable at 108 beginning in 2028, due 2032 (net of unamortized discount of $2) [note 8] |
58 |
Shareholders’ Equity | 7 |
Equity—stock warrants |
Note 8: Bonds (in part)
The 10.0% bonds were issued in 2005 at 98.0 to yield 10%. Interest
is paid semiannually on June 30 and December 31. Each $1,000 bond
is convertible into 30 shares of the Company’s no par common
stock.
The 11.0% bonds were issued in 2009 at 106 to yield 10%. Interest
is paid semiannually on June 30 and December 31. Each $1,000 bond
was issued with 30 detachable stock warrants, each of which
entitles the holder to purchase one share of the Company’s no par
common stock for $25, beginning 2019.
On January 3, 2019, when Bradley-Link’s common stock had a market
price of $32 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 $37 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 $140 cash for each bond converted. Prepare the journal
entry to record (book value method) the conversion of 90% of the
convertible bonds in January 2019.
4. Assume Bradley-Link induced conversion by
modifying the conversion ratio to exchange 35 shares for each bond
rather than the 30 shares provided in the contract. Prepare the
journal entry to record (book value method) the conversion of 90%
of the convertible bonds in January 2019.
5. Prepare the journal entry to record the
exercise of the warrants in December 2019.
rev: 02_06_2018_QC_CS-116686
($ in millions) | ($ in millions) | |
1) | Debit | Credit |
Convertible Bonds – 2005 issue | ||
Cash(98.67% x $300 million) | $296.00 | |
Discount on bonds (difference) | $4.00 | |
Convertible bonds payable (face amount) | $300.00 | |
Bonds With Warrants – 2009 issue | ||
Cash(108% x $60million) | $64.80 | |
Discount on bonds payable (difference) | $2.20 | |
Convertible bonds payable (face amount) | $60.00 | |
Equity – stock warrants (given) | $7.00 | |
2) | ||
Convertible bonds payable (90% x $300 million) | $270.00 | |
Discount on bonds payable (90%x $4 million) | $3.60 | |
Common stock (to balance) | $266.40 | |
Convertible bonds payable (10% x $300 million x ) | $30.00 | |
Loss on early extinguishment (to balance) | $2.10 | |
Discount on bonds payable (10%x $4 million) | $0.30 | |
Cash (106% x $300 M x 10%) | $31.80 | |
3) | ||
Convertible bonds payable (90% x $300 million) | $270.00 | |
Conversion expense (90% x 300,000 bonds x $140) | $37.80 | |
Discount on bonds payable (90%x $4 million) | $3.60 | |
Common stock (to balance) | $266.40 | |
Cash (90% x 300,000 bonds x $140) | $37.80 | |
4) | ||
Convertible bonds payable (90% x $300 million) | $270.00 | |
Conversion expense (90% x [300,000 x (35 – 30) shares] x $32) | $43.20 | |
Discount on bonds payable (90%x $4 million) | $3.60 | |
Common stock (to balance) | $309.60 | |
5) | ||
Cash(40% x 60,000 x 30 warrants x $25) | $18.00 | |
Equity – stock warrants (40% x $7 million) | $2.80 | |
Common stock(to balance) | $20.80 | |