Question

On January 1, 2019, when its $30 par value common stock was selling for $80 per share, Sarasota Corp. issued $11,300,000 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 $12,204,000. The present value of the bond payments at the time of issuance was $9,605,000, 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 0 for the amounts.)

(b) Prepare the entry to record the exercise of the conversion option, using the book value method.

Answer 1

Solution 12204000 11300000 I cash Bonds payable premium on bonds 904000 payable Bonds payable 3390000 premium on bonds payable (A) | 244080 Common stock ( 33900X15] paid in capital in excess of par a common stock 508500 3125580

904000 45200 45200 90400 Premium on bonds payable on 1 Jan 2019 Amortization for 2019 = 904000/20 Amortization for 2020 = 904000/20 premium on bonds payable on 1 Jan 2021 Bonds converted un amortized premium on bonds converted 813600 30% 244080 11300 56500 x 2 Number of bonds convertible on Jan 1, 2019 Number of bonds [ 11300000 / 1000] Number of shares each bond stock Split on Jan 1, 2020 Number of shares after stock splet Bonds converted Total number of shares on conversion on Jan I 113000 30°/ 33900