Question

Bradley-Link's December 31, 2018, balance sheet included the following items: ($ in millions) $196 Long-Term Liabilities 9.0% convertible bonds, callable at 103 beginning in 2019, due 2022 (net of unamortized discount of $4) (note 8] 11.0% registered bonds callable at 106 beginning in 2028, due 2832 (net of unamortized discount of $2) (note 8] Shareholders' Equity Equity-stock warrants points eBook Print Note 8: Bonds (in part) The 9.0% bonds were issued in 2005 at 97.5 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of the Company's no par common stock. References The 11.0% bonds were issued in 2009 at 104 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entities the holder to purchase one share of the Company's no par common stock for $25, beginning 2019 On January 3, 2019, 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 2019, 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 2005 and 2009 2. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019 and the retirement of the remainder.

Answer 1

1.

Prepare the journal entries that were recorded when each of the two bond issues was originally sold:

Credit | Event General Journal 1 Cash [($106+S4) 97.5%] Discount on bonds Convertible bonds payable (Face value) Debit $195 $5 $200 $60.42 $2.58 2 Cash [($55+$2) x 106% Discount on Bonds payable (b/f) Bond payable Equity-stock warrants $57

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2.

Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019 and the retirement of the remainder.

Credit Debit $180 Event General Journal 1 Convertible Bonds (200 x 90%) Discount on bonds ($4 x 90%) Common stock $3.60 $176.40 $20 $1.20 Convertible bonds payable ($200 x 10%) Loss on early extinguishment (b/f) Discount on Bonds payable ($4 x 10%) Cash ($200 x 104% - 10%) $0.40 $20.80

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3.

Assume Bradley-Link induced conversion by offering $160 cash for each bond converted. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019.

Event Credit Debit $180 $28.80 General Journal Convertible bonds payable ($200 x 90%) Conversion expense (200,000 bonds > 90% x $160) Discount on bonds payable (S4 x 90%) Cash (200.000 bonds ~ 90% $160) Common stock (b/f) $3.60 $28.80 $176.60

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4.

Assume Bradley-Link induced conversion by modifying the conversion ratio to exchange 35 shares for each bond rather than the 30 shares provided in the contract. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019.

Credit Event General Journal 1 Convertible bonds payable ($200 90%) Conversion expense [(200,000 bonds (35-30) < $32) 90%] || Discount on bonds payable ($4 x 90%) Common stock (b/f) Debit $180 $28.80 $3.60 $205.20