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On January 1, 2015, when its $30 par value common stock was selling for $80 per...

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Accounting

On January 1, 2015, when its $30 par value common stock wasselling for $80 per share, a corporation issued $30 million of 10%convertible debentures due in 10 years. The conversion optionallowed the holder of each $1,000 bond to convert it into sixshares of the corporation’s $30 par value common stock. Thedebentures were issued for $31 million. At the time of issuance,the present value of the bond payments was $28.50 million, and thecorporation believes the difference between the present value andthe amount paid is attributable to the conversion feature. OnJanuary 1, 2016, the corporation’s $30 par value common stock wassplit 3 for 1. On January 1, 2017, when the corporation’s $10 parvalue common stock was selling for $90 per share, holders of 40% ofthe convertible debentures exercised their conversion options. Thecorporation uses the straight-line method for amortizing any bonddiscounts or premiums.

Required:

1.Prepare the journal entry to record the original issuance ofthe convertible debentures.
2.Prepare the journal entry to record the exercise of theconversion option, using the book value method.

Answer & Explanation Solved by verified expert
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Answer:

Date Accounts Debit credit
2015
Jan-01 Cash $        31,000,000
   Premium on bonds payable $          1,000,000
   Bonds payable $        30,000,000
2017
Jan-01 Bonds payable $        12,000,000
Premium on bonds payable $              320,000
   common stock $          2,160,000
Additional Paid in capital $        10,160,000
Schedule 1
Premium on bonds payable on Jan 1 $          1,000,000
Amortization Year 1 $              100,000
Amortization Year 2 $              100,000
Premiu on bonds payable in year 2017 $              800,000
40%
Bonds converted $              320,000
Schedule 2
No of bonds                     30,000
30000000/1000
No of shares for each bond                               6
total                  180,000
stock split                               3
                 540,000
Bonds converted 40%
No of shares converted                  216,000
par $                   10.00
Par value $    2,160,000.00

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