Question

Exercise 16-4 On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Pina Corp. issued $12,500,000 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 $13,500,000. The present value of the bond payments at the time of issuance was $10,625,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, 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, 2018, 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 o for the amounts.) Account Titles and Explanation Debit Credit Cash 13500000 Bonds Payable 12500000 Premium on Bonds Payable 1000000 (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 o for the amounts.) Account Titles and Explanation Debit Credit Bonds Payable 3750000 Premium on Bonds Payable Common Stock Paid-in Capital in Excess of Par - Common Stock Click if you would like to Show Work for this question: Open Show Work

Answer 1

(a) Credit Debit $13,500,000 Account Titles and Explanation Cash Bonds Payable Premium on Bonds Payable $12,500,000 $1,000,000 (b) Credit Account Titles and Explanation Bonds Payable Premium on Bonds Payable Common Stock Paid-in Capital in Excess of Par-Common Stock Debit $3,750,000 $ 270,000 $562,500 | $3,457,500 Schedule 1 Computation of Unamortized Premium on Bonds Converted Premium on bonds payable on January 1, 2016 Amortization for 2016 ($1,000,000 = 20) Amortization for 2017 ($1,000,000 - 20) Premium on bonds payable on January 1, 2018 Bonds converted Unamortized premium on bonds converted $1,000,000 $50,000 $40,000 $100.000 $900,000 30% $270.000 Schedule 2 Computation of Common Stock Resulting from Conversion Number of shares convertible on January 1, 2016: Number of bonds ($12,500,000 = $1,000) Number of shares for each bond Stock split on January 1, 2017 Number of shares convertible after the stock split % of bonds converted Number of shares issued Par value/per share Total par value 12,500 X 562,500 X2 125,000 X 30% 37,500 $15 $562.500