On January 1, 2020, Oriole Corporation issued $6 million of 10-year, 7% convertible debentures at 106. Investment bankers believe that the debenture would have sold at 103 without the conversion privilege, Interest is to be paid semi-annually on June 30 and December 31. Each $1,000 debenture can be converted into 5 common shares of Oriole after December 31, 2021. On January 1, 2022, $414,000 of debentures are converted into common shares, and on March 31, 2022, an additional $414,000 of debentures are converted into common shares. Fair value of Oriole's common shares is $111 and $116 per share on January 1, 2022, and March 31, 2022, respectively. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight- line basis. Oriole follows ASPE. (a) Make the necessary journal entries using the book value method. (Hint: March 31, 2022: Accrue interest on bonds to be converted

On January 1, 2020, Oriole Corporation issued $6 million of 10-year, 7% convertible debentures at 106. Investment bankers believe that the debenture would have sold at 103 without the conversion privilege, Interest is to be paid semi-annually on June 30 and December 31. Each $1,000 debenture can be converted into 5 common shares of Oriole after December 31, 2021. On January 1, 2022, $414,000 of debentures are converted into common shares, and on March 31, 2022, an additional $414,000 of debentures are converted into common shares. Fair value of Oriole's common shares is $111 and $116 per share on January 1, 2022, and March 31, 2022, respectively. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight- line basis. Oriole follows ASPE. (a) Make the necessary journal entries using the book value method. (Hint: March 31, 2022: Accrue interest on bonds to be converted

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 4P

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Waseca Company had 5 convertible securities outstanding during all of 2019. It paid the appropriate interest (and amortized any related premium or discount using the straight line method) and dividends on each security during 2019. Each of the convertible securities is described in the following table: Additional data: Net income for 2019 totaled 119,460. The weighted average number of common shares outstanding during 2019 was 40,000 shares. No share options or warrants arc outstanding. The effective corporate income tax rate is 30%. Required: 1. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share. 2. Prepare a ranking of the order in which each of the convertible securities should be included in diluted earnings per share. 3. Compute basic earnings per share. 4. Compute diluted earnings per share. 5. Indicate the amount(s) of the earnings per share that Waseca would report on its 2019 income statement.
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.
Mills Company had five convertible securities outstanding during all of 2019. It paid the appropriate interest (and amortized any related premium or discount using the straight-line method) and dividends on each security during 2019. Each convertible security is described in the following table. The corporate income tax rate is 30%. Required: 1. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share. 2. Prepare a ranking of the order in which the securities would be included in the diluted earnings per share computations.
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On January 1, 2019, Brewster Company issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for 1,980,000. On July 1, 2022, Brewster issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewsters common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters common stock, which had a market value of 105 per share at the date of the conversion. Required: 1. Using the information about Brewster, answer the following questions: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why? 2. Using the information about Brewster, explain the following: a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why? b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement? 3. Based on the information provided about Brewster, answer the following questions: a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method? b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?
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