Question

On January 1, 2019, when its $30 par value common stock was selling for $80 per share, Sunland Corp. issued $10,600,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the corporation's common stock. The debentures were issued for $11.448,000. The present value of the bond payments at the time of issuance was $9,010,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2020, the corporation's $30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2021, when the corporation's $15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums. (a) Prepare the entry to record the original issuance of the convertible debentures. (Credit account titles are automatically indented when amount is entered Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts) Account Titles and Explanation Debit Credit Cash 11448.000 10,600,000 (b) Prepare the entry to record the exercise of the conversion option, using the book value method. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts.) Account Titles and Explanation Debit Credit

Answer 1

Ans: Journal entries

S.no	Account title and explanation	Debit($)	Credit($)
A)	Cash	11,448,000
	Premium on bonds payable		848,000
	Bonds payable		10,600,000
	( to record the issuance of convertible bonds)
B).	Bonds payable (10,600,000*30%)	3,180,000
	Premium on bonds payable(848,000*30%)-{848,000*30%*2/20)	228,960
	Common stock (10,600,000/1000)*30%*$15*10 shares)		477,000
	Paid in capital in excess of par (3,180,000+228,960-477,000)		2,931,960
	( to record conversion of debentures into common stock under book value method)