Question

Dilutive Securities and EPS Worksheets Part 1: Convertible Securities and Detachable Warrants I. JAMC Corp. issues $10,000,000 of bonds on May 24, 2018 at a discount of $600,000. Interest on the bonds is payable each October 24 and May 24 Each $1,000 bond (i.e., there were 10,000 issued) is convertible to 20 shares of common stock (par value $3). On October 24, 2022, 2,000 of the bonds are converted. At the time of the conversion, the total remaining unamortized discount is $450,000, the market value of the bonds is $960 each and the stock is quoted on the market at $120. 1. Prepare the journal entry at May 24, 2018 to record the initial issuance of the convertible bonds. 2. Prepare the journal entry at October 24, 2022 to record the bond conversion. II. GBV Corporation issues 2,000 shares of preferred stock (par value $1) on February 20, 2019 for $1.20 per share. Each share of the preferred stock is convertible to one share of common stock. 1,000 of the preferred shares are converted to common stock on November 11, 2023. 1. Prepare the journal entry to record the issuance of the preferred stock on February 20, 2019. 2. Assume that the par value of GBV's common stock is $0.50. Prepare the journal entry to record the conversion at November 11, 2023.

Answer 1

may 24 bond issue:

as the bond is issued thus cash will be coming in thus we will have to debit the account as per real account rule debit what comes in and credit what goes out, secondly, the discount is an expense thus nominal account rule debit all expenses and losses Credit all incomes and gains

cash account .................................... Dr $9,400,000

discount on bond issues.A/c............Dr $600,000

to convertible bond Account $10,000,000

(being bond issued at a discount)

October 24 conversion of bond:

when the bonds are converted into common stock the difference amount has to be transferred to the bond discount account.

Convertible bond Account A/c...................Dr $2,000,000

to discount on bond issue A/c. $80,000

to common stock A/c $1,920,000

II issue of preferred stock:

cash A/c..............................................Dr $2400

to preferred share A/c.     $2000

to share premium A/c $400

conversion of preferred stock to equity

preferred stock A/c.................................Dr $1000

to equity stock $1000

(being 2000 equity stock issued in place of 1000 preferred stock)