Exercise 16-4 On January 1, 2016, when its $30 par value common stock was sellin

Question

Exercise 16-4

On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Splish Corp. issued $10,700,000 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 $11,556,000. The present value of the bond payments at the time of issuance was $9,095,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, 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, 2018, 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.

(a) Prepare the entry to record the original issuance of the convertible debentures. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

(b) Prepare the entry to record the exercise of the conversion option, using the book value method. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Account Titles and Explanation

Debit

Credit

Explanation / Answer

SOLUTION

Schedule 1- Computation of Unamortized Premium on Bonds Converted

Schedule 2- Computation of Common Stock Resulting from Conversion

S.No. Account Titles and Explanation Debit ($) Credit ($) 1. Cash 11,556,000 Bonds Payable 10,700,000 Premium on Bonds Payable 856,000 (To record issuance of $10,700,000 of 8% convertible debentures for $11,556,000) 2. Bonds Payable 3,210,000 Premium on Bonds Payable (Schedule 1) 231,120 Common Stock, $15 par (Schedule 2) 481,500 Paid-in Capital in Excess of Par 2,959,620 (To record conversion of 30% of the outstanding 8% convertible debentures after giving effect to the 2-for-1 stock split)

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