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Accounting Entries for Convertible Bonds

Baden Corp issued €5,000,000 convertible bonds at 99% of par value. If not convertible, they would have been issued at 95%. Fleming Co issued €5,000,000 bonds at 98% of par value along with share warrants. The warrants were worth €4 each. Jackson, Inc called its €5,000,000 convertible bonds and converted them into 500,000 shares, paying an additional €35,000 to induce conversion. They used the book value method to record the conversion.

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30 views2 pages

Accounting Entries for Convertible Bonds

Baden Corp issued €5,000,000 convertible bonds at 99% of par value. If not convertible, they would have been issued at 95%. Fleming Co issued €5,000,000 bonds at 98% of par value along with share warrants. The warrants were worth €4 each. Jackson, Inc called its €5,000,000 convertible bonds and converted them into 500,000 shares, paying an additional €35,000 to induce conversion. They used the book value method to record the conversion.

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Exercise Problem Chapter 16 (part 1)

1. For each of the unrelated transactions described below, present the entry(ies) required to
record each transaction:

A) Baden Corp. issued €5,000,000 par value 10% convertible bonds at 99. If the bonds
had not been convertible, the company’s investment banker determines that they
would have been sold at 95.

B) Fleming Company issued €5,000,000 par value 10% bonds at 98. One share warrant
was issued with each €100 par value bond. At the time of issuance, the warrants were
selling for €4. The net present value of the bonds without the warrants was €4,800,000.

C) Jackson, Inc. called its convertible debt in 2019. Assume the following related to the
transaction: The 11% €5,000,000 par value bonds were converted into 500,000
shares of €1 par value ordinary shares on July 1, 2019. The carrying amount of the
debt on July 1 was €4,800,000. The Share Premium––Conversion Equity account had
a balance of €100,000 and the company paid an additional €35,000 to the
bondholders to induce conversion of all the bonds. The company records the
conversion using the book value method.
2. On January 1, 2022, Warren Corporation had 1,000,000 ordinary shares outstanding. On
March 1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the
corporation declared and issued a 2-for-1 share split. On October 1, the corporation purchased
on the market 600,000 of its own outstanding shares and retired them.

Instructions
Compute the weighted average number of shares to be used in computing earnings per share
for 2022.

Common questions

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Fleming Company issued €5,000,000 par value 10% bonds at 98, with one share warrant per €100 bond. The present value of the bonds without warrants was €4,800,000, and the warrants were selling for €4 each. The issuance should be recorded by allocating the issuance proceeds based on fair value: Debit Cash €4,900,000 (i.e., 98% of €5,000,000); Credit Bonds Payable €4,800,000; Credit Paid-in Capital - Warrants €100,000 (i.e., value assigned to warrants separately). The allocation ensures appropriate recognition of the equity feature in the financial statements.

To compute the weighted average number of shares for Warren Corporation in 2022, account for each transaction's timing and impact, as follows: Start with 1,000,000 shares; add 150,000 shares issued on March 1, weighted for 10 months (125,000 shares full year equivalent); adjust for the 2-for-1 share split effective July 1, doubling shares prior and post split to 2,250,000 shares for July to year-end; subtract 600,000 shares retired on October 1, weighted for 3 months (150,000 shares full year equivalent reduction). The calculated weighted average number of shares is 2,275,000.

Jackson, Inc. used the book value method to record the conversion of €5,000,000 par value convertible bonds into 500,000 shares of €1 par value on July 1, 2019. The carrying amount was €4,800,000, while inducements totaled €35,000. Entries include: Debit Convertible Bonds Payable €5,000,000, Credit Ordinary Shares €500,000 (500,000 shares at €1 each), Credit Share Premium - Conversion Equity €100,000, and Debit Share Premium - Inducement €35,000 for any payment beyond carrying value. This method reflects no recognition of gain or loss on conversion but records investors' incentives equitably.

Baden Corp. issued €5,000,000 par value 10% convertible bonds at 99, below the par value. These bonds, if non-convertible, would have been sold at 95. The conversion feature thus adds value, which should be accounted for by allocating the issued amount between the bond liability and the equity component upon issuance. This difference reflects the investor’s value placed on the convertibility feature of the bonds. Thus, accounting for it would involve recording a premium on issuance of convertible bonds as follows: Debit Cash €4,950,000 (i.e., 99% of €5,000,000), Credit Convertible Bonds Payable €4,750,000 (i.e., 95% of €5,000,000), and Credit Equity component €200,000 (i.e., 4% of €5,000,000)

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