The following events relate to Mathers Corporation\'s issue of convertible deben
ID: 2513905 • Letter: T
Question
The following events relate to Mathers Corporation's issue of convertible debentures On Januar for $460,000. The bonds a January 1. Each $1,000 bond is convertible into 30 shares of com value of S1 at $24 On January 2, 2017, 12% convertible bonds with a face value of $300,000 were converted into common stock. The market value of the common stock on the date of conversion was S40 per share. Mathers uses the straight-line method to amortize premiums and discounts. y 1, 2015, the Mathers Corporation issued $500,000 of 12% convertible bonds re due on January 1, 2025, and interest is paid on July 1 and per share. On the date of bond issuance, a share of common stock was selling Required: a. Prepare the journal entry to record the issuance of the convertible bonds. b. Record the conversion on January 2, 2017, using: (1)the book value method (2) the market value method Assuming that any gain or loss on conversion is material, how would it be disclosed in C. the financial statements?Explanation / Answer
(a) Bank A/c Dr 460000
Discount on Bond A/c dr 40000
to 12% Convertible Bond 500000
(b)(1) 12% Convertible Bond dr 300000
to Disc on Bond 19200 (*32000/500000*300000)
to Common Stock 9000 (30*1/1000*300000)
to Addition paid-in-capital 271800 (Balancing fig)
*Discount amortised per year = 40000/10 = 4000
Balance Disc on 2 january 2017 = 40000-4000-4000 = 32000
(2) Bond Payable a/c dr 300000
Loss on conversion of Bond 79200
to Disc on Bond a/c 19200
to Common Stock 9000
to Addition in capital 351000 [(40-1)*30/1000*300000]
3.If a company retires a bond prior to maturity, the stated book value (or carry value for a discount or premium bond) will most likely be the same as market value for which the company repurchased the bond. This difference creates an extraordinary gain or loss for the repurchasing company. This gain or loss is classified as extraordinary because it is non-recurring in nature. Extraordinary gains and losses are reported on the income statement below the operating line net of taxes.
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