Exercise 16-4 On January 1, 2013, when its $30 par value common stock was sellin
ID: 2483570 • Letter: E
Question
Exercise 16-4 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. 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
Cash 12,182,400
Bonds Payable.................................................................... 11,280,000
Premium on Bonds Payable.............................................. 902,400
(To record issuance of $11,280,000
of 8% convertible debentures for
$12,182,400. The bonds mature
in twenty years, and each $1,000
bond is convertible into five shares
of $30 par value common stock)
(b) Bonds Payable...................................................................... 3,384,000
Premium on Bonds Payable
(Schedule 1) ..................................................................... 243,648
Common Stock, $15 par
(Schedule 2) ........................................................... 507,600
Paid-in Capital in Excess of Par............................... 3,120,048
(To record conversion of 30%
of the outstanding 8% convertible
debentures after giving effect
to the 2-for-1 stock split)
Schedule 1
Computation of Unamortized Premium on Bonds Converted
Premium on bonds payable on January 1, 2013 $902,400
Amortization for 2013 ($902,400÷ 20) $45,120
Amortization for 2004 ($902,400÷ 20) 45,120 90,240
Premium on bonds payable on January 1, 2015 812,160
Bonds converted 30%
Unamortized premium on bonds converted $243,648
Schedule 2
Computation of Common Stock Resulting from Conversion
Number of shares convertible on January 1, 2013:
Number of bonds ($11,280,000 ÷ $1,000) 11,280
Number of shares for each bond X 5 56,400
Stock split on January 1, 2014 X 2
Number of shares convertible after the stock split 112,800
% of bonds converted X 30%
Number of shares issued 33,840
Par value/per share $15
Total par value $507,600
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