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Chapter 16: Q1E (page 874)

(Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction.

1. Grand Corp. issued \(20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at 95.

2. Hoosier Company issued \)20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each \(100 par value bond. At the time of issuance, the warrants were selling for \)4.

3. Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the transaction. The 11%, \(10,000,000 par value bonds were converted into 1,000,000 shares of \)1 par value common stock on July 1, 2017. On July 1, there was \(55,000 of unamortized discount applicable to the bonds, and the company paid an additional \)75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

Short Answer

Expert verified
  1. Cash and Discount on bonds payable will be debited and Bonds payable will be credited.
  2. Cash and Discount on bonds payable will be debited and Bonds payable; Paid-in Capital—Stock Warrants will be credited.
  3. Debt Conversion Expense and Bonds Payable will be debited and Discount on Bonds Payable; Common Stock; Paid-in Capital in Excess of Par, and Cash will be credited.

Step by step solution

01

Computation of Value of bonds  

Warrants($20,000,000 X .98)

$19,600,000

Less: Value of warrants (200,000 X $4)

$800,000

Value of bonds

$18,800,000

02

Journal entry

Transactions

Accounts and Explanation

Debit

Credit

(1)

Cash ($20,000,000*0.99%)

19,800,000

Discount on Bonds Payable ($20,000,000* 0.1%)

200,000

Bonds Payable

2,000,000

Being Grand Corp. issued $20,000,000 par value 10% convertible bonds at 99

(2)

Cash ($20,000,000* 0.98%)

19,600,000

Discount on Bonds Payable ($20,000,000*0.2%)

1,200,000

Bonds Payable

20,000,000

Paid-in Capital—Stock Warrants ($20,000,000*4%)

800,000

Being Hoosier Company issued $20,000,000 par value 10% bonds at 98 and at the time of issuance, the warrants were selling for $4

(3)

Debt Conversion Expense

75,000

Bonds Payable

10,000,000

Discount on Bonds Payable

55,000

Common Stock

1,000,000

Paid-in Capital in Excess of Par

8,945,000

Cash

75,000

Being company records the conversion using the book value method

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Most popular questions from this chapter

GROUPWORK (Entries for Various Dilutive Securities) The stockholders’ equity section of Martino Inc. at the beginning of the current year appears below.

Common stock, \(10 par value, authorized 1,000,000

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of par—common stock 600,000

Retained earnings 570,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at \(32. The rights were void after 30 days. The market price of the stock at this time was \)34 per share.

2. The company sold to the public a \(200,000, 10% bond issue at 104. The company also issued with each \)100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at \(30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at \)8.

3. All but 5,000 of the rights issued in (1) were exercised in 30 days.

4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing.

5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives.

The company, using a fair value option-pricing model, determines that each option is worth \(10. The option price is \)30.

The options were to expire at year-end and were considered compensation for the current year.

6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

(a) Prepare general journal entries for the current year to record the transactions listed above.

(b) Prepare the stockholders’ equity section of the balance sheet at the end of the current year. Assume that retained earnings

at the end of the current year is $750,000.

Question: Petrenko Corporation has outstanding 2,000 \(1,000 bonds, each convertible into 50 shares of \)10 par value ordinary shares. The bonds are converted on December 31, 2017. The bonds payable has a carrying value of \(1,950,000 and conversion equity of \)20,000. Record the conversion using the book value method.

Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance of the bonds.

Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that instead of options, Barwood granted 2,000 shares of restricted stock.

What are stock rights? How does the issuing company account for them?
See all solutions

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