Bradley-Link’s December 31, 2016, balance sheet included the following items: Lo
ID: 2427459 • Letter: B
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 Note 8: 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. 8% convertible bonds were issued at 96 in 2003. In the balance sheet of December 31, 2016 , the value of bonds is $144million and unamortized discount is $6 million. So total bond value is $150 million. Bonds are issued at discount. So the cash received will be $150 * 96% = $144 million. Journal entry in 2003 will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
Xx/xx/2003
Cash A/c Dr.
$144
Discount on bonds payable A/c Dr.
$ 6
To 8% convertible bonds A/c
$150
(Issue of bonds at discount)
11% registered bonds were issued at 103 in 2007. In the balance sheet of December 31, 2016, the value of bonds is $52 and unamortized discount is $2. Actually it should be unamortized premium as the bonds are issued at premium. So total bond value is $52 million - $2 million = $50 million. Bonds are issued premium. So the cash received will be $50 * 103% = $51.5 million. As the stock warrant has no par value, it will not be accounted. Journal entry in 2007 will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
Xx/xx/2007
Cash A/c Dr.
$51.50
To 11% registered bonds A/c
$50
To Premium on bonds payable A/c
$ 1.50
(Issue of bonds at premium)
2. Out of the $150 million bonds 80 percent were converted to common stock of no par value. The conversion will give 50 shares for each $1,000 bond. Total bond value converted is $150 million * 80% = $120 million. No. of shares issued will be $120,000,000/1,000 * 50 = 6,000,000 shares. Related unamortized discount will be reversed. It will be $6 million * 80% = $4.80 million. Journal entry for the transaction will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
01/xx/2017
8% convertible bonds A/c Dr.
$120
To Discount on bonds payable A/c
$ 4.80
To Common Stock A/c
$115.20
(80% of the convertible stock are converted to common stock of no par value)
Remaining convertible bonds were retired. It will be $150 million * 20% = $30 million. Related unamortized discount will be reversed. It will be $6 million * 205 = $1.2 million. Journal entry for the transaction will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
01/xx/2017
8% convertible bonds A/c Dr.
$30
To Discount on bonds payable A/c
$ 1.20
To Cash A/c
$28.80
(20% of the convertible stock are retired)
3. 90% of the convertible bonds is $150 million * 90% = $135 million. No. of bonds converted is $135 milion/$1000 = 135,000. Cash paid for each bond is $120. Total cash paid is 135,000 * $120 = $16.2 million. Unamortized discount on 90% of convertible bonds is $6 million * 90% = $5.4 million. Number of shares issued will be 135,000 * 50 = 6,750,000 shares. As the book value method is used, market price is irrelevant. Journal entry for the transaction will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
01/03/2017
8% convertible bonds A/c Dr.
$135
Loss on conversion of bonds A/c Dr.
$ 16.20
To Discount on bonds payable A/c
$ 5.40
To Cash A/c
$ 16.20
To Common stock A/c
$129.60
(90% of the convertible bonds are converted by paying $120 per bond)
Remainder of the bonds were acquired at call price. Remainder value of bonds is $150 million * 10% = $15 million. Callable at 102. So the cash to be paid is $15 million * 102% = $15.3 million. Unamortized discount of 10% convertible bonds is $6 million * 10% = $0.6million. Carrying value of the 10% convertible bonds is $15 million - $0.6 million = $14.4 million. The difference between cash paid and the carrying value is the loss on the call. That will be $15.3 million - $14.4 million = $0.9 million. Journal entry will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
01/03/2017
8% convertible bonds A/c Dr.
$15
Loss on retirement of bonds A/c Dr.
$ 0.90
To Discount on bonds payable A/c
$ 0.60
To Cash A/c
$15.30
(10% of the convertible bonds are called at 102)
4. 80% of the convertible bonds will be 120,000 as per the calculations done in 2 above. 55 shares are issued for each bond. So the number of common stock issued will be 120,000 * 55 = 6,600,000 shares. As there is no par value, the amounts will be same as in 2 above. Journal entry will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
01/xx/2017
8% convertible bonds A/c Dr.
$120
To Discount on bonds payable A/c
$ 4.80
To Common Stock A/c
$115.20
(80% of the convertible stock are converted to common stock of no par value)
5. First let us calculate number of stock warrants issued. Each $1,000 bond has 50 stock warrants. Total value of 11% registered bonds is $50 million. So number of bonds is $50 million/$1,000 = 50,000 bonds. No. of stock warrants = 50,000 * 50 = 2,500,000 stock warrants. Stock warrants allow the holder to purchase one common stock at $30. 40% of the stock warrants are exercised. It will be 2,500,000 * 40% = 1,000,000 shares. As mentioned above stock warrants are not accounted as there is no par value. Cash paid to acquire the shares will be 1,000,000 * $30 = $30 million. Journal entry will be as below. Amounts in millions
Date
Account Titles and Explanation
Debit
Credit
12/xx/2017
Cash A/c Dr.
$30
To Additional paid-up capital A/c
$30
(40% of the stock warrants are exercised by paying $30 per stock warrant)
Date
Account Titles and Explanation
Debit
Credit
Xx/xx/2003
Cash A/c Dr.
$144
Discount on bonds payable A/c Dr.
$ 6
To 8% convertible bonds A/c
$150
(Issue of bonds at discount)
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