E16.25 (LO 1, 5) (EPS with Convertible Bonds and Preference Shares) The Ottey Corporation issued 10-year, $4,000,000 par, 7% callable convertible subordinated debentures on January 2, 2022. The bonds have a par value of $1,000, with interest payable annually. The interest expense recorded on the liability component of the convertible bond for 2022 was $320,000. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Ottey's effective tax was 35%. Net income in 2022 was $7.500,000, and the company had 2,000,000 shares outstanding during the entire year. Instructions a. Prepare a schedule to compute both basic and diluted eanings per share. b. Discuss how the schedule would differ if the security was convertible preference shares.

E16.25 (LO 1, 5) (EPS with Convertible Bonds and Preference Shares) The Ottey Corporation issued 10-year, $4,000,000 par, 7% callable convertible subordinated debentures on January 2, 2022. The bonds have a par value of $1,000, with interest payable annually. The interest expense recorded on the liability component of the convertible bond for 2022 was $320,000. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Ottey's effective tax was 35%. Net income in 2022 was $7.500,000, and the company had 2,000,000 shares outstanding during the entire year. Instructions a. Prepare a schedule to compute both basic and diluted eanings per share. b. Discuss how the schedule would differ if the security was convertible preference shares.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable

Section: Chapter Questions

Problem 21E: On July 2, 2018, McGraw Corporation issued 500,000 of convertible bonds. Each 1,000 bond could be...

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On July 2, 2018, McGraw Corporation issued 500,000 of convertible bonds. Each 1,000 bond could be converted into 20 shares of the companys 5 par value stock. On July 3, 2020, when the bonds had an unamortized discount of 7,400 and the market value of the McGraw shares was 52 per share, all the bonds were converted into common stock. Required: 1. Prepare the journal entry to record the conversion of the bonds under (a) the book value method and (b) the market value method. 2. Compute the companys debt-to-equity ratio (total liabilities divided by total shareholders equity, as described in Chapter 6) under each alternative. Assume the companys other liabilities are 2 million and shareholders equity before the conversion is 3 million. 3. Assume the company uses IFRS and issued the bonds for 487,500 on July 2, 2018. On this date, it determined that the fair value of each bond was 930 and the fair value of the conversion option was 45 per bond. Prepare the journal entry to record the issuance of the bonds.
2. On January 1, 2020, ABC Corporation issued P5,000,000, 12%, convertible bonds. The privilege allows the holder the right to convert the liability instrument into 25 ordinary shares with P25 par value for every P1000 convertible bond, with minimum cash out of P2 per share. The quoted market price of the bonds including the conversion feature cannot be determined reliably on this date but the effective interest rate of these instruments with the privilege is 10%. It requires payment of interest every January 1 starting 2021 until its maturity on January 1, 2028. The quoted price of the bonds ex – privilege cannot be determined reliably as well, however; the market interest rate of the bonds ex-privilege is 13% at the date of issue. Determine the amount to be allocated to the equity component out of the proceeds of the entire issue. (Use 4-decimal PVF and round off final answer to whole number)
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