Part 1 Convertible Bonds
Wedge Corporation issued $1,500,000 of 10% convertible bonds for $1,620,000 on March 1, 2016. The bonds are dated March 1, 2016, pay interest semiannually on August 31 and February 28, and any premiums or discounts are amortized using the straight-line method. The bonds are due on February 28, 2026 (10 years), and each $1,000 bond is convertible into 25 shares of Wedge’s $10 par common stock. Wedge’s common stock was currently trading at $35 (just to let you know there is currently no beneficial conversion feature).
On March 1, 2018, when the market value of Wedge’s common stock was $41 per share, holders of $300,000 face value of the bonds converted their bonds into common stock.
- 1. Prepare the Wedge’s journal entry to record the issuance of the convertible bond.
- 2. Determine the book value of Wedge’s bonds on February 28, 2018, immediately after payment of interest and premium amortization.
- 3. Prepare Wedge’s March 1, 2018, journal entry to record the conversion of $300,000 face value of its bonds into common stock. Use the book value method.
- 4. Prepare Wedge’s March 1, 2018, journal entry to record the same event, using the far less common market value method. (No help here!)
Part 2 Bonds with Detachable Stock Warrants
On January 1, 2016, Paris Corporation issued $500,000 of 11.5% bonds due January 1, 2023, at 103. The bonds pay interest semiannually on June 30 and December 31. Each $1,000 bond carried 20 warrants, and the exchange of each warrant allowed the holder to acquire one share of $5 par common stock for $25. The warrants were excisable for 60 days. Shortly after issue, the bonds were quoted at 98 ex rights and each individual warrant was quoted at $4 (e.g., normal “imperfect market conditions”).
On February 10, 8,000 of the warrants were exercised. On March 1, 2016, the remaining 2,000 warrants expired.
- 1. Prepare the entry to record the issue of the bonds with detachable stock warrants.
- 2. Prepare the February 10 entry to record the exchange of the warrants for common shares.
- 3. Prepare the March 1 entry to record the expiration of the remaining warrants.