On January 1, 2013, when its $32 par value common stock was selling for $72 per

Question

On January 1, 2013, when its $32 par value common stock was selling for $72 per share, Plato Corp. issued $11,670,000 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 $12,603,600. The present value of the bond payments at the time of issuance was $8,615,000, 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 $32 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 $16 par value common stock was selling for $147 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.

(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.)

Explanation / Answer

First of all no amount is attributed to conversion features (like common stock or APIC). this is the rule, that 's why at the date of issuance the J/E is

1) Cash Dr. $12,603,600

Bonds Premium Cr. $933,600

Bonds Payable Cr. $11,670,000

At the date of conversion only 30% holder converted into common stock on 1/1/2015 so have to amortise two years premium and book value of bond at the date of conversion.

Amortisation of Bond Premium =$933,600/20 years =$46,680 per year

So $46,680*2 years = $93,360 total amortisation

Book value of bond =$12,603,600-$93,360 =$12,510,240

But only 30% holder covert their bond so $12,510,240*30% = $3,753,072 is the book value of the bond.

Remember that under book value method we never book any gain or loss. So J/E at he date of conversion is

Bond Payable Dr.$3501,000

Bonds Premuim Dr $252,072

Common Stock Cr. (35,010 shares *$16 per share)    $560,160

APIC Cr. $3,192,912

Calculation for shares =$11,670,000 *30% =$35,01,000/$1000 per bond = 3501 bond

3501 bond * 5 shares per bond =17,505, but we split 2 for 1 so, we double the share 17,505*2= 35010 shares given to holder.

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