On January 1, 2023, Legis Company issued 10-year, P200,000 face value, 6% bonds at par (payable annually on January 1). Each P1,000 bond is convertible into 30 shares of Legis P2 par value ordinary shares. The company has had 10,000 ordinary shares (and no preference shares) outstanding throughout its life. None of the bonds have been converted as of the end of 2024. Legis also adopted a share-option plan that granted options to key executives to purchase 4,000 shares of the company's ordinary shares. The options were granted on January 2, 2023, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expire 6 years from the date of grant. The option price was set at P4, and the fair value option pricing model determines the total compensation expense to be P18,000. All of the options were exercised during the year 2025: 3,000 on January 3 when the market price was P6, and 1,000 on May 1 when the market price was P7 a share. (Ignore all tax effects.)

On January 1, 2023, Legis Company issued 10-year, P200,000 face value, 6% bonds at par (payable annually on January 1). Each P1,000 bond is convertible into 30 shares of Legis P2 par value ordinary shares. The company has had 10,000 ordinary shares (and no preference shares) outstanding throughout its life. None of the bonds have been converted as of the end of 2024. Legis also adopted a share-option plan that granted options to key executives to purchase 4,000 shares of the company's ordinary shares. The options were granted on January 2, 2023, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expire 6 years from the date of grant. The option price was set at P4, and the fair value option pricing model determines the total compensation expense to be P18,000. All of the options were exercised during the year 2025: 3,000 on January 3 when the market price was P6, and 1,000 on May 1 when the market price was P7 a share. (Ignore all tax effects.)

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter7: Financial Activities

Section: Chapter Questions

Problem 10QE

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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.
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