Question

1-Suppose a firm issues a 1,000 Convertible Preference Shares for with a par value of $100 each. Each preference share is convertible into 5 Ordinary Shares with a par value of $5. The credit entry to “Share Premium – Conversion Equity” on the date of issue was for $200,000.   Assume that the maturity date of the Convertible Shares has now arrived and the Convertible Preference Shares will be converted into Ordinary Shares.

The Debit Entry to the “Share Premium – Conversion Equity” account on the date of conversion will be for an amount of:

2-Suppose a firm issues a single bond with a face value of $100,000 which is Convertible into 10,000 Ordinary Shares with a Par Value of $1. The credit entry to “Share Premium – Conversion Equity” on the date of issue was for $20,000.    Assume that the maturity date of the bonds has now arrived and the bonds will be converted into Ordinary Shares.

The Credit Entry to the “Share Premium – Ordinary Shares” account on the date of conversion will be for an amount of:

3-Suppose 30 Convertible Bonds with a face value each of $1,000 are issued at Par. Each Convertible Bond is convertible into 20 Ordinary Shares. Suppose the Convertible Bonds are repurchased (i.e., repaid) at Par for Cash

How many new Ordinary Shares will result from the Repurchase of the Convertible Bonds for cash:

Answer 1

Solution:

1:-

The entry at the time of issue of Convertible Preference Shares:

Bank Account Debited $300,000

to Preference Share Capital Account $100,000 (1000*100)

to Share Premium- Conversion Equity Account $200,000  (As mentioned in Question)

The entry at the time of conversion of Convertible Preference Share to Ordinary Share:

Preference Share Captial Account $100,000

Share Premium-Conversion Equity Account $ 200,000

to Share Capital Account $ 25,000 (1000*5*5)

to Share Premium- Ordinary Equity Account $275,000 (100,000+200,000-25,000)

The amount Share Premium- Conversion Equity will be fully transferred to Share Premium- Ordinary Equity Account at the time of conversion i.e $ 200,000.

2:-

The entry at the time of issue of the Convertible Bonds issue:-

Bank Account Debited $120,000

to Convertible Bond Account $ 100,000

to Share Premium- Conversion Equity $20,000

The entry at the time of conversion of the Convertible Bonds to Ordinary Shares:-

Convertible Bond Account Debited $ 100,000

Share Premium- Conversion Equity Account Debited $20,000

to Share Capital Account Account $10,000

to Share Premium- Ordinary Equity Account $ 110,000 (100,000+20,000-10,000)

The credit entry Share Premium- Ordinary Equity Account will be amount of  $ 110,000

3:-

If Convertible Bonds are not repurchased then it will result in 600 (30*20) Ordinary Shares.

However, as mentioned in the question, the convertible bonds are repurchased at par in cash, so there will NO new ordinary shares resultant.