On January 1, 2013, when its $32 par value common stock was selling for $75 per

Question

On January 1, 2013, when its $32 par value common stock was selling for $75 per share, Plato Corp. issued $11,960,000 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 $12,916,800. The present value of the bond payments at the time of issuance was $9,461,000, 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 $155 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.

(b) Prepare the entry to record the exercise of the conversion option, using the book value method. Show supporting computations in good form.

Explanation / Answer

Journal entry:

At the time of converstion only 30% of the debebtureholders excercised the option hence we need to amortize the two years premium and book value of the bonds

Amortisation of premium = $956,000/20 = $47,800 per year

hence for two years = 47,800 * 2 = $95,600

Book value of bonds = $12,916,000 - $95,600 = $12,820,400

For 30% value of bond = $12,820,400 @30% = $3846,120 book value of bond

We will not record any gain or loss under book value method

Calculation of number of shares = $3588,000/1000 = 3588 bonds invested

3588 @5 = 17,940 shares but we split 2 for 1 , so we double the share

= 17940 * 2 = 35,880 shares given to holder

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