On January 1, 2015, when its $30 par value common stock was selling for $80 per
ID: 2542050 • Letter: O
Question
On January 1, 2015, when its $30 par value common stock was selling for $80 per share, a corporation issued $10 million of 10% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert it into six shares of the corporation’s $30 par value common stock. The debentures were issued for $11 million. At the time of issuance, the present value of the bond payments was $8.5 million, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2016, the corporation’s $30 par value common stock was split 3 for 1. On January 1, 2017, when the corporation’s $10 par value common stock was selling for $90 per share, holders of 40% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums. Required: 1. Prepare the journal entry to record the original issuance of the convertible debentures. 2. Prepare the journal entry to record the exercise of the conversion option, using the book value method.
Entry 1 (3 Accounts): Prepare the journal entry to record the original issuance of the convertible debentures on January 1, 2015.
Entry 2 (4 Accounts): Prepare the journal entry to record the exercise of the conversion option, using the book value method on January 1, 2017.
Explanation / Answer
Solution:
1) Preparing the Journal Entries to Record the Original Issuance of the Convertible Debentures:
2) Preparing the Journal Entry to Record the Exercise of the Conversion Option, Using the Book Value:
Computations:
Schedule 1:
Computation of Unamortized Premiumon
Bonds Converted
Schedule 2:
Computation of Common Stock
Resulting from Conversion
Date Account Title and Explanation Debit Credit Jan 1, 2015 Cash $11,000,000 Bonds Payable $10,000,000 Premium on Bonds Payable $1,000,000 (To record issuance of $10,000,000 of 10% convertible debentures for $11,000,000. Thebonds mature in 10 years, and each $1,000 bond is convertible into six shares of $30 par value common stock)Related Questions
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