Bradley-Link’s December 31, 2016, balance sheet included the following items: Lo

Question

Bradley-Link’s December 31, 2016, balance sheet included the following items: Long-Term Liabilities ($ in millions) 8.0% convertible bonds, callable at 102 beginning in 2017, due 2020 (net of unamortized discount of $6) [note 8] $144 11.0% registered bonds callable at 105 beginning in 2026, due 2030 (net of unamortized discount of $2) [note 8] 52 Shareholders’ Equity 5 Equity—stock warrants Bonds (in part) The 8.0% bonds were issued in 2003 at 96.0 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 50 shares of the Company’s no par common stock. The 11.0% bonds were issued in 2007 at 103 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitles the holder to purchase one share of the Company’s no par common stock for $30, beginning 2017. On January 3, 2017, when Bradley-Link’s common stock had a market price of $37 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 $42 in December of 2017, 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 2003 and 2007 2. Prepare the journal entry to record (book value method) the conversion of 80% of the convertible bonds in January 2017 and the retirement of the remainder. 3. Assume Bradley-Link induced conversion by offering $120 cash for each bond converted. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2017. 4. Assume Bradley-Link induced conversion by modifying the conversion ratio to exchange 55 shares for each bond rather than the 50 shares provided in the contract. Prepare the journal entry to record (book value method) the conversion of 80% of the convertible bonds in January 2017. 5. Prepare the journal entry to record the exercise of the warrants in December 2017

Explanation / Answer

1 Prepare Journal Entry that were recorded when bonds were sold in 2003 and 2007 Cash 144000000 Bonds Issued at a Discount 6000000 150000000 To Bonds Payable 150000000 (8% Convertible bonds Issued @ 96) Cash 52000000 To Bonds Payable 50000000 To Premium on Bonds Payable 2000000 (11% Bonds Issued @103) 2 Prepare the journal entry to record (book value method) the conversion of 80% of the convertible bonds in January 2017 and the retirement of the remainder. Carrying Value of Bonds Converted= 144000000*80% 115200000 Number of Bonds Converted=150000*80/100 120000 Number of Shares to be Issued=120000*50 6000000 Bonds Payable 120000000 150000000 To Discount on Bonds 4800000 6000000 To Equity Shares 30000000 144000000 To Paid In Capital 85200000 Bonds Payable 30000000 Loss on Retirement of Bonds 1200000 To Discount on Bonds 1200000 To Cash 30000000

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