Exercise 16-4 Account Titles and Explanation Debit Credit Account Titles and Exp

Question

Exercise 16-4

Account Titles and Explanation

Debit

Credit

Account Titles and Explanation

Debit

Credit

Exercise 16-4

Your answer is partially correct. Try again. On January 1, 2013, when its $30 par value common stock was selling for $74 per share, Plato Corp. issued $11,280,000 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 $12,182,400. The present value of the bond payments at the time of issuance was $8,667,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2014, 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, 2015, when the corporation’s $15 par value common stock was selling for $173 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 original issuance of the convertible debentures. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

(b) Prepare the entry to record the exercise of the conversion option, using the book value method. Show supporting computations in good form. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Explanation / Answer

Cash                                     12,182,400

       To    8 % convertable debentures                            11,280,000

        To premium on issue                                                     902,400

8 % Convertable debentures                33,84,000

Premium on issue                                    2,43,648

Retained earnings                                   22,26,672

              To Common Stock (3,3840*15)                         5,07,600

               To Additional paid in Capital (33,840*158)    53,46,720

Premium on issue: face value : 12,182,400 - 11,280,000 = 902,400/-

Number of bonds converted: 11,280,000/ 1,000 * .3 =   3384

Number of shares issued: 3,384 * 10 = 33,840

Face value of shares issued: 33,840 * 15 = 507,600/-

Premium on issue 33,840 (173-15)   = 53,46,720

                    

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