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A15-11 Convertible Debt; Investor Option versus ConversionMandatory (LO 15-3, 15-4)

AMC Ltd. issued five-year, 5% bonds for their par value of$900,000 on 1 January 20X1. Interest is paid annually. The bondsare convertible to common shares at a rate of 50 common shares forevery $1,000 bond.

(PV of $1, PVA of $1, and PVAD of $1.) (Use appropriatefactor(s) from the tablesprovided.)

Required:
1. Assume that the bonds were convertible at the investor’s optionand that the conversion option was valued at $73,800.

a. Provide the journal entry on issuance. (If no entryis required for a transaction/event, select "No journal entryrequired" in the first account field.)

b. Calculate interest expense for each year of the bond’s five-yearlife. Use an interest rate of 7% for this requirement.(Round your intermediate calculations and final answers tothe nearest whole dollar.)

c. Provide the journal entry to record maturity of the bondassuming shareholders convert their bonds to common shares.(If no entry is required for a transaction/event, select"No journal entry required" in the first accountfield.)

d. Assume instead that the bonds were repaid for $940,000 afterinterest was paid in Year 3. Provide the journal entry forretirement, assuming $68,000 of the payment related to the optionand the rest related to the bond. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field. Round your intermediate and final answers tothe nearest whole dollar.)

2. Assume that the bonds were mandatorily convertible atmaturity.

a. Calculate the portion of the original proceeds relating tointerest and the equity portion. Use a discount rate of 6%.(Round your final answers to the nearest whole dollar.Round time value factor to 5 decimal places.)

b. Provide the journal entry on issuance. (If no entryis required for a transaction/event, select "No journal entryrequired" in the first account field. Round your final answers tothe nearest whole dollar. Round time value factor to 5 decimalplaces.)