On January 1, 2018, when its $30 par value common stock was selling for$80 per share, a corporation issued $10 million of 10% convertibledebentures due in 10 years. The conversion option allowed the holder ofeach $1,000 bond to convert it into six shares of the corporation's $30 parvalue 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 andthe amount paid is attributable to the conversion feature. On January 1,2019, the corporation's $30 par value common stock was split 3 for 1. OnJanuary 1, 2020, when the corporation's $10 par value common stock was selling for $90 per share, holders of 40% of the convertible debenturesexercised their conversion options. The corporation uses the straight-linemethod for amortizing any bond discounts or premiums. Required: 1. Prepare the journal entry to record the original issuance of theconvertible debentures.2. Prepare the journal entry to record the exercise of the conversionoption, using the book value method. Show supporting computationsin good form.
On January 1, 2018, 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
and the corporation believes the difference between the present value and
the amount paid is attributable to the conversion feature. On January 1,
2019, the corporation's $30 par value common stock was split 3 for 1. On
January 1, 2020, 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
convertible debentures.
2. Prepare the journal entry to record the exercise of the conversion
option, using the book value method. Show supporting computations
in good form.
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