(Conversion of Bonds) On January 1, 2006, when its $30 par value common stock was selling for $80 per share, Plato Corp. issued $10,000,000 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 $10,800,000. The present value of the bond payments at the time of issuance was $8,500,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2007, 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, 2008, 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.
Hint: (LO 1)
Instructions
a.
Prepare in general journal form the entry to record the original issuance of the convertible debentures.
b.
Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method. Show supporting computations in good form
(a) Cash ………………………………………………………………… 10,800,000
Bonds Payable………………………………………………………….. 10,000,000
Premium on Bonds Payable………………………………………. 800,000
(To record issuance of $10,000,000
of 8% convertible debentures for
$10,800,000. The bonds mature
in twenty years, and each $1,000
bond is convertible into five shares
of $30 par value common stock)
(b) Bonds Payable……………………………………………………………. 3,000,000
Premium on Bonds Payable
(Schedule 1) …………………………………………………………… 216,000
Common Stock, $15 par
(Schedule 2) ………………………………………………….. 450,000
Paid-in Capital in Excess of Par…………………………. 2,766,000
(To record conversion of 30%
of the outstanding 8% convertible
debentures after giving effect
to the 2-for-1 stock split)
Schedule 1
Computation of Unamortized Premium on Bonds Converted
Premium on bonds payable on January 1, 2006 $800,000
Amortization for 2006 ($800,000 ÷ 20) $40,000
Amortization for 2007 ($800,000 ÷ 20) 40,000 80,000
Premium on bonds payable on January 1, 2008 720,000
Bonds converted 30%
Unamortized premium on bonds converted $216,000
Schedule 2
Computation of Common Stock Resulting from Conversion
Number of shares convertible on January 1, 2006:
Number of bonds ($10,000,000 ÷ $1,000) 10,000
Number of shares for each bond X 5 50,000
Stock split on January 1, 2007 X 2
Number of shares convertible after the stock split 100,000
% of bonds converted X 30%
Number of shares issued 30,000
Par value/per share $15
Total par value $450,000
