Answered: Prepare the journal entry to record the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

On January 1, 2018, when its $30 par value common stock was selling for $70 per share, a corporation issued $20 million of 14% 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 $21 million. At the time of issuance, the present value of the bond payments was $18.50 million, 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 $80 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.

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