Low land Company had two issues of securities outstanding: common stock and 10%
ID: 2464439 • Letter: L
Question
Low land Company had two issues of securities outstanding: common stock and 10% convertible bond issue in the face amount of $110,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2014, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $750,000. In applying the book value method, what amount should Low Land company credit to the account "paid-in capital in excess of par," as a result of this conversion?
Low land Company had two issues of securities outstanding: common stock and 10% convertible bond issue in the face amount of $110,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2014, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $750,000. In applying the book value method, what amount should Low Land company credit to the account "paid-in capital in excess of par," as a result of this conversion?
Explanation / Answer
Converting Bonds Into Common Stock
Some bonds can be converted or exchanged into common stock. Under SFAS 14 the convertible feature of a bond is completely ignored when the bond is issued, and it is considered only when it is converted into equity. The effect of a conversion of a bond into common stock is a decrease in liabilities for the carrying value of the bond and an increase in stockholders' equity for an amount equal to the bond carrying value. Gains or losses on bond conversion are not recognized. Any difference between the carrying value of the bond converted and the par value of the new shares issued is recorded in the account called "contributed capital in excess of par value". The market value of the common stock is ignored.
Total Value of Bond holders excersice the conversion option = 1800000
No of Common shares are received by the above bond holder = 1800000/1000*40shares
No fo shares =
72,000 Shares
Par Value of the Shares on Conversion Date =
(72000 shares * 20)
1440000
Bond value Conversion Excersiced
1800000
Add : Unamortised bond discount of above face of bonds
12280
(750000/110000000*1800000)
Carry Value of the Bonds
1787720
Less: Par Value of New Shares
1440000
Amount credit to the account "paid-in capital in excess of par,"
347720
Note: Under Book value method market price of shares and bond value are not considered.
Total Value of Bond holders excersice the conversion option = 1800000
No of Common shares are received by the above bond holder = 1800000/1000*40shares
No fo shares =
72,000 Shares
Par Value of the Shares on Conversion Date =
(72000 shares * 20)
1440000
Bond value Conversion Excersiced
1800000
Add : Unamortised bond discount of above face of bonds
12280
(750000/110000000*1800000)
Carry Value of the Bonds
1787720
Less: Par Value of New Shares
1440000
Amount credit to the account "paid-in capital in excess of par,"
347720
Note: Under Book value method market price of shares and bond value are not considered.
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