Question

(Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction.

1. Grand Corp. issued \(20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at 95.

2. Hoosier Company issued \)20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each \(100 par value bond. At the time of issuance, the warrants were selling for \)4.

3. Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the transaction. The 11%, \(10,000,000 par value bonds were converted into 1,000,000 shares of \)1 par value common stock on July 1, 2017. On July 1, there was \(55,000 of unamortized discount applicable to the bonds, and the company paid an additional \)75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

Short answer

1. Cash and Discount on bonds payable will be debited and Bonds payable will be credited.
2. Cash and Discount on bonds payable will be debited and Bonds payable; Paid-in Capital—Stock Warrants will be credited.
3. Debt Conversion Expense and Bonds Payable will be debited and Discount on Bonds Payable; Common Stock; Paid-in Capital in Excess of Par, and Cash will be credited.

Step-by-step solution

Computation of Value of bonds  

Warrants($20,000,000 X .98)	$19,600,000
Less: Value of warrants (200,000 X $4)	$800,000
Value of bonds	$18,800,000

Journal entry

Transactions	Accounts and Explanation	Debit	Credit
(1)	Cash ($20,000,000*0.99%)	19,800,000
	Discount on Bonds Payable ($20,000,000* 0.1%)	200,000
	Bonds Payable		2,000,000
	Being Grand Corp. issued $20,000,000 par value 10% convertible bonds at 99
(2)	Cash ($20,000,000* 0.98%)	19,600,000
	Discount on Bonds Payable ($20,000,000*0.2%)	1,200,000
	Bonds Payable		20,000,000
	Paid-in Capital—Stock Warrants ($20,000,000*4%)		800,000
	Being Hoosier Company issued $20,000,000 par value 10% bonds at 98 and at the time of issuance, the warrants were selling for $4
(3)	Debt Conversion Expense	75,000
	Bonds Payable	10,000,000
	Discount on Bonds Payable		55,000
	Common Stock		1,000,000
	Paid-in Capital in Excess of Par		8,945,000
	Cash		75,000
	Being company records the conversion using the book value method