Question

(Conversion of Bonds) On January 1, 2016, 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, 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 exercisedtheir conversion options. The corporation uses the straight-line method for amortizing anybond discounts or premiums.

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.

Short answer

(a) Cash account is debited by $10,800,000, and bonds payable is credited by $10,000,000 and premium on bonds payable is credited by $800,000.

(b) Bonds Payable is debited by $3,000,000, and Premium on Bonds Payable is credited by $216,000, and Common Stock is credited by $450, 000 and Paid-in Capital in Excess of Par is credited by $2,766,000.

Step-by-step solution

(a) Journal entry for recording issuance of convertible debentures

Date	Accounts and Explanation	Debit	Credit
	Cash	10,800,000
	Bonds Payable		10,000,000
	Premium on Bonds Payable		800,000
	(To record issuance of convertible debentures)

(b) Journal entry for recording conversion

Date	Accounts and Explanation	Debit	Credit
	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 debebtures)

 Calculation of unamortized premium on bonds converted

Calculation of Unamortized Premium on Bonds Converted
Premium on bonds payable on January 1, 2016,	$800,000
Less: Amortization for 2016 ($800,000 ÷ 20)	(40,000)
Less: Amortization for 2017 ($800,000 ÷ 20)	(40,000)
Premium on bonds payable January 1, 2018	$720,000
Bonds conversion
Unamortized premium on bonds converted ($720,000 x 30%)	$216,000

 Step 4: Calculation of total par value

Calculation of Common Stock Resulting from Conversion
Number of shares convertible on January 1, 2016:
Number of bonds ($10,000,000 ÷ $1,000)	10,000
Number of shares for each bond X 5	50,000
Number of shares convertible after stock split (50,000 x 2)	100,000
Number of shares issued by conversion (100,000 x 30%)	30,000
Total par value (30,000 x $15)	$450,000