Question

On January 1, 2019, when its $30 par value common stock was selling for $80 per share, Blossom Corp. issued $12,200,000 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 $13,176,000. The present value of the bond payments at the time of issuance was $10,370,000, 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

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

Answer 1

Answer:

a.)

Date	Account Title	Debit		Credit
Jan 1,2019	Cash	13,176,000
	8% Convertible Debentures			12,200,000
	Premium on 8% convertible Debentures			976,000
	(Issue of $ 12200000 8% Conv. Deb. For $ 13176000--each convertible into 5 shares of $ 30 par value common stock)

Working 1
Unamortized Premium on debentures Converted
Premium on bonds payable on January 1, 2016 $800,000		976,000
St.line amortisation-in 2019(976000/20)	48800
St.line amortisation-in 2020(976000/20)	48800
Total amortised as on Jan,1 2021		97600
Bal.in Premium on debentures payable on January 1, 2021 (976000-97600)		878400
% of Debentures converted	30%
So,Unamortized premium on debentures converted (878400*30%)		263520

Working 2
Common Stock on Conversion
No. of shares convertible on January 1, 2019:
No.of conv.debentures (12,200,000/1,000) issued	12200
No. of shares for each debenture(5*12200)	61000
No.of shares of common stock on Stock split on January 1, 2020(61000*2)
So,no. of shares convertible after the stock split	122000
% of debenture converted	30%
So, no. of shares issued (122000*30%)	36600
Par value/per share $15
Total par value(36600*15)	549000

b.)

	. Conversion using book-value method:
Date	Account Title	Debit	Credit
1-Jan-2021	8% Convertible debentures(12,200,0000*30%)	3,660,000
	Premium on 8% Conv. Debentures(Workings1)	263,520
	Common Stock(36600*15 Par)(Working 2)		549,000
	Paid-in-capital in Excess of par(Plug-in Value)		3,374,520
	(To record conversion of 30% of 8% Convertible debentures o/s as at Jan 1, 2021)