Question

On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Bonita 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 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

(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 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Answer 1

Answer:

Date	Account Title	Debit($)	Credit($)
Jan 1,2016	Cash	1,35,00,000
	8% Convertible Debentures		1,25,00,000
	Premium on 8% convertible Debentures		10,00,000
	(Issue of $ 12500000 8% Conv. Deb. For $ 13500000--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		10,00,000
St.line amortisation-in 2016(10,00,000/20)	50,000
St.line amortisation-in 2017(10,00,000/20)	50,000
Total amortised as on Jan,1 2018		1,00,000
Bal.in Premium on debentures payable on January 1, 2018		9,00,000
% of Debentures converted	30%
So,Unamortized premium on debentures converted (900,000*30%)		2,70,000
Working 2
Common Stock on Conversion
No. of shares convertible on January 1, 2016:
No.of conv.debentures (12,500,000 /1,000) issued	12,500
No. of shares for each debenture(5*12500)	62,500
No.of shares of common stock on Stock split on January 1, 2017(62500*2)
So,no. of shares convertible after the stock split	1,25,000
% of debenture converted	30%
So, no. of shares issued (125,000*30%)	37,500
Par value/per share $15
Total par value(37,500*15)	5,62,500

b. Conversion using book-value method:
Date	Account Title	Debit($)	Credit($)
01-Jan-18	8% Convertible debentures(12,500,000*30%)	37,50,000
	Premium on 8% Conv. Debentures(Workings1)	2,70,000
	Common Stock(37,500*15 Par)(Working 2)		5,62,500
	Paid-in-capital in Excess of par(Plug-in Value)		34,57,500
	(To record conversion of 30% of 8% Convertible debentures o/s as at Jan 1, 2018)