Question

Bradley-Link's December 31, 2021, balance sheet included the following items: ($ in millions) $196 Long-Term Liabilities 11.08 convertible bonds, callable at 101 beginning in 2022, due 2025 (net of unamortized discount of $4) [note 8) 11.8% registered bonds callable at 104 beginning in 2031, due 2035 (net of unamortized discount of $1) [note 8] Shareholders' Equity Equity-stock warrants Note 8: Bonds (in part) The 11.0% bonds were issued in 2008 at 97.0 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of the Company's no par common stock. The 11.8% bonds were issued in 2012 at 102 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitles the holder to purchase one share of the Company's no par common stock for $25, beginning 2022. On January 3, 2022, when Bradley-Link's common stock had a market price of $32 per share, Bradley-Link called the convertible bonds to force conversion. 90% were converted; the remainder were acquired at the call price. When the common stock price reached an all-time high of $37 in December of 2022, 40% of the warrants were exercised. Required: 1. Prepare the journal entries that were recorded when each of the two bond issues was originally sold in 2008 and 2012. 2. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022 and the retirement of the remainder. 3. Assume Bradley-Link induced conversion by offering $140 cash for each bond converted. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022. 4. Assume Bradley-Link induced conversion by modifying the conversion ratio to exchange 45 shares for each bond rather than the 40 shares provided in the contract. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022. 5. Prepare the journal entry to record the exercise of the warrants in December 2022.

Answer 1

	($ in millions)	($ in millions)
1)	Debit	Credit
Convertible Bonds – 2008 issue
Cash(97% x $200 million)	194
Discount on bonds (difference)	6
Convertible bonds payable (face amount)		200
Bonds With Warrants – 2009 issue
Cash(102% x $52 million)	53.04
Discount on bonds payable (difference)	4.96
Convertible bonds payable (face amount)		52
Equity – stock warrants (given)		6
2)
Convertible bonds payable (90% x $200 million)	180
Discount on bonds payable (90%x $4 million)		3.6
Common stock (to balance)		176.4
Convertible bonds payable (10% x $200 million )	20
Loss on early extinguishment (to balance)	0.6
Discount on bonds payable (10%x $4 million)		0.4
Cash (101% x $200 M x 10%)		20.2
3)
Convertible bonds payable (90% x $200 million)	180
Conversion expense (90% x 200,000 bonds x $140)	25.2
Discount on bonds payable (90%x $4 million)		3.6
Common stock (to balance)		176.4
Cash (90% x 200,000 bonds x $140)		25.2
4)
Convertible bonds payable (90% x $200 million)	180
Conversion expense (90% x [200,000 x (45 – 40) shares] x $32	28.8
Discount on bonds payable (90%x $4 million)		3.6
Common stock (to balance)		205.2
5)
Cash(40% x 52,000 x 40 warrants x $25)	20.8
Equity – stock warrants (40% x $6 million)	2.4
Common stock(to balance)		23.2