5. Convertible Bonds with Beneficial Conversion Option (7 points) On 1/1/2018, H

Question

5. Convertible Bonds with Beneficial Conversion Option (7 points) On 1/1/2018, Husky, Inc. issues $20,000,000 of five-year, 1% convertible bonds at par. Each $1,000 bond in the issue converts to 20 shares of $1 par value common stock at the option of the bondholder beginning two years after issue. The market price of Husky's common stock on the date of issue is $54 and interest is paid annually each December 31. Assume that half of the bonds were converted on 1/1/2020 and at that date the carrying value (net book value) of the entire issue of convertible bonds is $19,000,000. Required: Prepare the journal entry for issuance of Husky's convertible bonds on 1/1/2018. (3 points) Prepare the journal entry for conversion of half of the convertible bonds on 1/1/2020. (4 points) a. b.

Explanation / Answer

Date

Accounts and explanations

Debit ($)

Credit ($)

01-01-18

Bank

20000000

Loss on issue of bond

1600000

1% Convertible bond

21600000

(Being the convertible bond issued)

Workings:

Note 1:

Number of bond

Total issue

20000000

Bond par value

1000

Number of bond

20000

Number of shares to be issued for each bond

20

Market value of per share as on the date of issue of bond

54

Convertible value of each bond

1080

(20 x 54)

Bond to be recorded

21600000

(1080 X 20000)

Date

Accounts and explanations

Debit ($)

Credit ($)

01-01-20

1% Convertible bond

9500000

(19000000/2)

Profit and loss account / Retained earnings

1300000

{(10600000+200000)-9500000}

Equity share capital

200000

Excess of paid up capital

10600000

(10000 X20) X (54-1)

10800000

(Being the 10000 bonds converted into common stock)

Workings:

Note 2:

Total number of bond

20000

Half of the above

10000

(20000 / 2)

Share value for conversion

10800000

Date

Accounts and explanations

Debit ($)

Credit ($)

01-01-18

Bank

20000000

Loss on issue of bond

1600000

1% Convertible bond

21600000

(Being the convertible bond issued)

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