Question

Why couldn't This Be Easy, Inc. has two issues of securities outstanding: common stock and $4,900,000 face value, 5-year, 3%, convertible bonds. The bonds were issued January 1, 2020, for $4.679.926 when the market rate was 4%. Bond interest payment dates are June 30" and December 315. Each bond is convertible into 40 shares of $20 par value common stock. On July 1, 2020, the holders of $1,470,000 face value bonds exercised the conversion privilege. On that date, the bonds were selling at 110 and the market price of the stock was $35. The company uses the effective interest method for the amortization of bond discounts and/or premiums and the book value method to account for the conversion. Required: Determine the amount to be credited to "Paid-in-Capital for Common Stock" on July 1, 2020. If an amortization table is needed (hint-through June 30, 2020 -hint), please prepare that on the back of this paper. Round all work to the nearest dollar.

Answer 1

Solution:

Initial Recognition:

Liability to be recognized

Bank A/c	Dr	49,00,000
Liability	Cr		46,79,926
Share options	Cr		2,20,074

Subsequent Recognition:

Difference between the interest expense & interest paid will be added to Liability component.

01/07/2020:

Interest Expense = Carrying Value * Interest Amount

Interest paid = Face Value * Coupon Rate

For 3% Convertible Bonds of FV $ 49,00,000:

Date	Carrying Value	Interest Expense	Cash Paid
01-01-2020	46,79,926	93,599	73,500
01-07-2020	47,00,025

For 3% Convertible Bonds of FV $ 14,70,000:

Carrying Value = (46,79,926 * 14,70,000)/4900000 = 1403978

Date	Carrying Value	Interest Expense	Cash Paid
01-01-2020	14,03,978	28,080	22,050
01-07-2020	14,10,007

Amount to be credited in Paid up value on 1st July 2020 on conversion:

Paid up capital = (14,70,000/100) * 40 * 20 = $ 11,76,000

Liability	Dr	$14,10,007
Share Options	Dr	$9,884
Share Capital	Cr		$11,76,000
Share Premium	Cr		$2,43,892