Question

)n 1/1/17, Smith textiles issued 12-year, zero coupon, convertible bonds with a total face value of 7,000,000 ($1,000 per bond). Each bond is convertible into 10 shares of Smith’s $1 par common stock. The convertible bonds were issued for a total of $5,266,215. Without the conversion option, the bonds would have been issued for $3,942,686. On 1/1/17, Smith’s common stock was trading at $50 per share. on 7/31/19, the stock was trading at $89 per share and all the bonds were exchanged for common stock. The unamortized discount on the bonds was $1,400,665 at that date. What is included in the journal entry to record the 7/31/19 exchange of the convertible bonds?

Answer 1

In the given case, the zero coupon bonds have been issued for a tenure of 12 years. Post the 12 year span , the bonds will be converted to common stock . However the bonds have been converted to the common stock prior to the tenure . They have been converted after 2 years of the issue of the bonds.

The above bonds are  debt convertible into equity shares of the issuer company i.e Smith . In case the  investors opt to  convert, they forgo all the accrued and unpaid interest. The investors choose to convert when the value of equity shares appreciates .

	Bonds Payable	$                5,599,335
	Discount on Bonds Payable		$              1,400,665
	Common Stock (70000 x $1 par)		$                    70,000
	Paid in capital in excess of par value ( balancing figure)		$              4,128,670

Carrying value of bonds on 31.7.19

Total amortization of discount = FV - Issue price = 70,00,000-5266215	$                1,733,785
Less: Unamortized balance as on 31.7.19	$                1,400,665
Total discount amortized till 31.7.19	$                   333,120

Issue price recorded in books on 1.1.17	$                5,266,215
Add: Amortized discount till 31.7.19	$                   333,120
Total carrying value of bonds as on 31.7.19	$                5,599,335

Journal entry on 31.7.19

Bonds Payable	$                5,599,335
Discount on Bonds Payable		$              1,400,665
Common Stock (70000 x $1 par)		$                    70,000
Paid in capital in excess of par value ( balancing figure)		$              4,128,670