Question

Bradley-Link’s December 31, 2021, balance sheet included the following items:

Long-Term Liabilities	($ in millions)
8.0% convertible bonds, callable at 102 beginning in 2022, due 2025 (net of unamortized discount of $3) [note 8]	$147
8.8% registered bonds callable at 105 beginning in 2031, due 2035 (net of unamortized discount of $1) [note 8]	64
Shareholders’ Equity	6
Equity—stock warrants

Note 8: Bonds (in part)
The 8.0% bonds were issued in 2008 at 94.0 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 50 shares of the Company’s no par common stock.

The 8.8% bonds were issued in 2012 at 103 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitles the holder to purchase one share of the Company’s no par common stock for $30, beginning 2022.

On January 3, 2022, when Bradley-Link’s common stock had a market price of $37 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 $52 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 55 shares for each bond rather than the 50 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

Bradley-Link Requirement 1 Journal Enteries Event Particulars Cash a/c Dr. Discount on bonds payable a/c Dr. To Convertible bonds payable Convertible Bonds-2005 issue Cash (94% Ⓡ$150 million) = $141 Debit in $ Credit in $ 141 9 150 2 Dr. 66.95 4.05 Cash a/c Discount on bonds payable a/c Dr. To Convertible bonds payable To Equity-Stock warrants Bonds with Warrants-2009 issue Cash (103% < $65 million) = $66.95 Requirement 2 Journal Enteries Event Particulars Debit in $ Credit in $ 1 Convertible bonds payable a/c Dr. 135 To Discount on bonds payable 2.7 To Common stock 132.3 Convertible bonds payable (90% x $150 million) = $135.0 Discount on bonds payable (90% x $3 million) = $2.7 2 Convertible bonds payable a/c Dr. 15 Loss on early extinguishment a/c Dr. 0.6 To Discount on bonds payable 0.3 To Cash 15.3 Convertible bonds payable (10% Ⓡ$150 million) = $15.0 Discount on bonds payable (10% $3 million) = $0.3 Cash (102% x 10% < $150 million) = $15.3

Requirement 3 Journal Enteries Event Particulars Debit in $ Credit in $ Convertible bonds payable a/c Dr. 135 Conversion expense a/c Dr. 18.9 To Discount on bonds payable 2.7 To Common stock 132.3 To Cash 18.9 Convertible bonds payable (90% x $150 million) = $135 Conversion expense (90% x 150,000 bonds * $140) = $18.9 Discount on bonds payable (90% x $3 million) = $2.7 Requirement 4 Journal Enteries Event Particulars Debit in $ Credit in $ 1 Convertible bonds payable a/c Dr. 135 Conversion expense a/c Dr. 24.97 To Discount on bonds payable 2.7 To Common stock 157.27 Convertible bonds payable (90% * $150 million) = $135 Conversion expense (90% x [150,000 < (55-50) shares] × $37) = $24.97 Discount on bonds payable (90% x $3 million) = $2.7 Requirement 5 Journal Enteries Event Particulars Debit in $ Credit in $ i Cash a/c Dr. 15 Equity-Stock warrants a/c Dr. - 2.4 To Common stock 17.4 Cash (40% x 25,000 x 50 warrants x $30) = $15.0 Equity-stock warrants (40% < $6 million) = $2.4