Prepare journal entry to record the conversion of bonds under book value method.

Question

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Answer 1

Question

Chapter 14, Problem 21E

1.a.

To determine

Prepare journal entry to record the conversion of bonds under book value method.

1.a.

Expert Solution

Explanation of Solution

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare journal entry to record the conversion of bonds under the book value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Discount on bonds payable		$7,400
	Common stock (1)		$50,000
	Additional paid in capital - Common stock (balancing figure)		$442,600
	(To record conversion of bonds)

Table (1)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $442,600.

Working notes:

(1)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

b.

To determine

Prepare journal entry to record the conversion of bonds under the market value method.

b.

Expert Solution

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Loss on Conversion (balancing figure)	$27,400
	Discount on bonds payable		$7,400
	Common stock (2)		$50,000
	Additional paid - In capital on Common stock (3)		$470,000
	(To record conversion of bonds)

Table (2)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Loss on conversion is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on conversion account for $27,400.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $470,000.

Working notes:

(2)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Calculate additional paid in capital – common stock.

(3)Calculate common stock.

$Additional paid in capital - common stock) = (Bonds payableNumber of convertible bonds × Convertible common shares × (Market value per share −Face value per share))= ($500,000$1,000) × 20 Common shares × ($52−$5)= 500 × 20× $5= $470,000$

2.

To determine

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

2.

Expert Solution

Explanation of Solution

Compute debt to equity ratio before the conversion.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600$3,000,000= 0.831$

Compute debt to equity ratio after conversion accounted for with book value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$492,600= $2,000,000$3,492,600= 0.573$

Compute debt to equity ratio after conversion computed for with market value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$520.000−$27,400= $2,000,000$3,492,600= 0.573$

3.

To determine

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

3.

Expert Solution

Explanation of Solution

Date	Account Titles and Explanation	Debit	Credit
July 2, 2021	Cash	$487,500
	Bonds payable		$465,000
	Share premium conversion equity (4)		$22,500
	(To record issuance of bonds payable)

Table (3)

Cash is a current asset, and it is increased. Therefore, debit cash account for $487,500.
Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $465,000.
Share premium conversion equity is a component of stockholders’ equity, and it is increased. Therefore, credit share premium conversion equity account for $22,500.

Working note:

(4)Calculate share premium conversion equity.

$Share premium conversion equity )= (Bonds payableNumber of convertible bonds × (Fair value of conversion option))= ($500,000$1,000) × $45= 500 ×$45= $22,500$

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Answer 2

Question

Chapter 14, Problem 21E

1.a.

To determine

Prepare journal entry to record the conversion of bonds under book value method.

1.a.

Expert Solution

Explanation of Solution

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare journal entry to record the conversion of bonds under the book value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Discount on bonds payable		$7,400
	Common stock (1)		$50,000
	Additional paid in capital - Common stock (balancing figure)		$442,600
	(To record conversion of bonds)

Table (1)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $442,600.

Working notes:

(1)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

b.

To determine

Prepare journal entry to record the conversion of bonds under the market value method.

b.

Expert Solution

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Loss on Conversion (balancing figure)	$27,400
	Discount on bonds payable		$7,400
	Common stock (2)		$50,000
	Additional paid - In capital on Common stock (3)		$470,000
	(To record conversion of bonds)

Table (2)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Loss on conversion is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on conversion account for $27,400.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $470,000.

Working notes:

(2)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Calculate additional paid in capital – common stock.

(3)Calculate common stock.

$Additional paid in capital - common stock) = (Bonds payableNumber of convertible bonds × Convertible common shares × (Market value per share −Face value per share))= ($500,000$1,000) × 20 Common shares × ($52−$5)= 500 × 20× $5= $470,000$

2.

To determine

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

2.

Expert Solution

Explanation of Solution

Compute debt to equity ratio before the conversion.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600$3,000,000= 0.831$

Compute debt to equity ratio after conversion accounted for with book value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$492,600= $2,000,000$3,492,600= 0.573$

Compute debt to equity ratio after conversion computed for with market value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$520.000−$27,400= $2,000,000$3,492,600= 0.573$

3.

To determine

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

3.

Expert Solution

Explanation of Solution

Date	Account Titles and Explanation	Debit	Credit
July 2, 2021	Cash	$487,500
	Bonds payable		$465,000
	Share premium conversion equity (4)		$22,500
	(To record issuance of bonds payable)

Table (3)

Cash is a current asset, and it is increased. Therefore, debit cash account for $487,500.
Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $465,000.
Share premium conversion equity is a component of stockholders’ equity, and it is increased. Therefore, credit share premium conversion equity account for $22,500.

Working note:

(4)Calculate share premium conversion equity.

$Share premium conversion equity )= (Bonds payableNumber of convertible bonds × (Fair value of conversion option))= ($500,000$1,000) × $45= 500 ×$45= $22,500$

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Answer 3

Question

Chapter 14, Problem 21E

1.a.

To determine

Prepare journal entry to record the conversion of bonds under book value method.

1.a.

Expert Solution

Explanation of Solution

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare journal entry to record the conversion of bonds under the book value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Discount on bonds payable		$7,400
	Common stock (1)		$50,000
	Additional paid in capital - Common stock (balancing figure)		$442,600
	(To record conversion of bonds)

Table (1)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $442,600.

Working notes:

(1)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

b.

To determine

Prepare journal entry to record the conversion of bonds under the market value method.

b.

Expert Solution

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Loss on Conversion (balancing figure)	$27,400
	Discount on bonds payable		$7,400
	Common stock (2)		$50,000
	Additional paid - In capital on Common stock (3)		$470,000
	(To record conversion of bonds)

Table (2)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Loss on conversion is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on conversion account for $27,400.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $470,000.

Working notes:

(2)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Calculate additional paid in capital – common stock.

(3)Calculate common stock.

$Additional paid in capital - common stock) = (Bonds payableNumber of convertible bonds × Convertible common shares × (Market value per share −Face value per share))= ($500,000$1,000) × 20 Common shares × ($52−$5)= 500 × 20× $5= $470,000$

2.

To determine

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

2.

Expert Solution

Explanation of Solution

Compute debt to equity ratio before the conversion.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600$3,000,000= 0.831$

Compute debt to equity ratio after conversion accounted for with book value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$492,600= $2,000,000$3,492,600= 0.573$

Compute debt to equity ratio after conversion computed for with market value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$520.000−$27,400= $2,000,000$3,492,600= 0.573$

3.

To determine

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

3.

Expert Solution

Explanation of Solution

Date	Account Titles and Explanation	Debit	Credit
July 2, 2021	Cash	$487,500
	Bonds payable		$465,000
	Share premium conversion equity (4)		$22,500
	(To record issuance of bonds payable)

Table (3)

Cash is a current asset, and it is increased. Therefore, debit cash account for $487,500.
Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $465,000.
Share premium conversion equity is a component of stockholders’ equity, and it is increased. Therefore, credit share premium conversion equity account for $22,500.

Working note:

(4)Calculate share premium conversion equity.

$Share premium conversion equity )= (Bonds payableNumber of convertible bonds × (Fair value of conversion option))= ($500,000$1,000) × $45= 500 ×$45= $22,500$

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Answer 4

Question

Chapter 14, Problem 21E

1.a.

To determine

Prepare journal entry to record the conversion of bonds under book value method.

1.a.

Expert Solution

Explanation of Solution

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare journal entry to record the conversion of bonds under the book value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Discount on bonds payable		$7,400
	Common stock (1)		$50,000
	Additional paid in capital - Common stock (balancing figure)		$442,600
	(To record conversion of bonds)

Table (1)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $442,600.

Working notes:

(1)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

b.

To determine

Prepare journal entry to record the conversion of bonds under the market value method.

b.

Expert Solution

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Loss on Conversion (balancing figure)	$27,400
	Discount on bonds payable		$7,400
	Common stock (2)		$50,000
	Additional paid - In capital on Common stock (3)		$470,000
	(To record conversion of bonds)

Table (2)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Loss on conversion is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on conversion account for $27,400.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $470,000.

Working notes:

(2)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Calculate additional paid in capital – common stock.

(3)Calculate common stock.

$Additional paid in capital - common stock) = (Bonds payableNumber of convertible bonds × Convertible common shares × (Market value per share −Face value per share))= ($500,000$1,000) × 20 Common shares × ($52−$5)= 500 × 20× $5= $470,000$

2.

To determine

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

2.

Expert Solution

Explanation of Solution

Compute debt to equity ratio before the conversion.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600$3,000,000= 0.831$

Compute debt to equity ratio after conversion accounted for with book value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$492,600= $2,000,000$3,492,600= 0.573$

Compute debt to equity ratio after conversion computed for with market value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$520.000−$27,400= $2,000,000$3,492,600= 0.573$

3.

To determine

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

3.

Expert Solution

Explanation of Solution

Date	Account Titles and Explanation	Debit	Credit
July 2, 2021	Cash	$487,500
	Bonds payable		$465,000
	Share premium conversion equity (4)		$22,500
	(To record issuance of bonds payable)

Table (3)

Cash is a current asset, and it is increased. Therefore, debit cash account for $487,500.
Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $465,000.
Share premium conversion equity is a component of stockholders’ equity, and it is increased. Therefore, credit share premium conversion equity account for $22,500.

Working note:

(4)Calculate share premium conversion equity.

$Share premium conversion equity )= (Bonds payableNumber of convertible bonds × (Fair value of conversion option))= ($500,000$1,000) × $45= 500 ×$45= $22,500$

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Answer 5

Chapter 14, Problem 21E

1.a.

To determine

Prepare journal entry to record the conversion of bonds under book value method.

1.a.

Expert Solution

Explanation of Solution

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare journal entry to record the conversion of bonds under the book value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Discount on bonds payable		$7,400
	Common stock (1)		$50,000
	Additional paid in capital - Common stock (balancing figure)		$442,600
	(To record conversion of bonds)

Table (1)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $442,600.

Working notes:

(1)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

b.

To determine

Prepare journal entry to record the conversion of bonds under the market value method.

b.

Expert Solution

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Loss on Conversion (balancing figure)	$27,400
	Discount on bonds payable		$7,400
	Common stock (2)		$50,000
	Additional paid - In capital on Common stock (3)		$470,000
	(To record conversion of bonds)

Table (2)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Loss on conversion is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on conversion account for $27,400.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $470,000.

Working notes:

(2)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Calculate additional paid in capital – common stock.

(3)Calculate common stock.

$Additional paid in capital - common stock) = (Bonds payableNumber of convertible bonds × Convertible common shares × (Market value per share −Face value per share))= ($500,000$1,000) × 20 Common shares × ($52−$5)= 500 × 20× $5= $470,000$

2.

To determine

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

2.

Expert Solution

Explanation of Solution

Compute debt to equity ratio before the conversion.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600$3,000,000= 0.831$

Compute debt to equity ratio after conversion accounted for with book value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$492,600= $2,000,000$3,492,600= 0.573$

Compute debt to equity ratio after conversion computed for with market value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$520.000−$27,400= $2,000,000$3,492,600= 0.573$

3.

To determine

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

3.

Expert Solution

Explanation of Solution

Date	Account Titles and Explanation	Debit	Credit
July 2, 2021	Cash	$487,500
	Bonds payable		$465,000
	Share premium conversion equity (4)		$22,500
	(To record issuance of bonds payable)

Table (3)

Cash is a current asset, and it is increased. Therefore, debit cash account for $487,500.
Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $465,000.
Share premium conversion equity is a component of stockholders’ equity, and it is increased. Therefore, credit share premium conversion equity account for $22,500.

Working note:

(4)Calculate share premium conversion equity.

$Share premium conversion equity )= (Bonds payableNumber of convertible bonds × (Fair value of conversion option))= ($500,000$1,000) × $45= 500 ×$45= $22,500$

Answer 6

Chapter 14, Problem 21E

1.a.

To determine

Prepare journal entry to record the conversion of bonds under book value method.

1.a.

Expert Solution

Explanation of Solution

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare journal entry to record the conversion of bonds under the book value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Discount on bonds payable		$7,400
	Common stock (1)		$50,000
	Additional paid in capital - Common stock (balancing figure)		$442,600
	(To record conversion of bonds)

Table (1)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $442,600.

Working notes:

(1)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Answer 7

Chapter 14, Problem 21E

1.a.

To determine

Prepare journal entry to record the conversion of bonds under book value method.

Answer 8

1.a.

Expert Solution

Explanation of Solution

Induced Conversion:

Induced conversion is a method wherein, the convertible bonds issued by the company are converted into common stock in order to reduce interest costs or for increasing the debt-to-equity ratio of the company.

Prepare journal entry to record the conversion of bonds under the book value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Discount on bonds payable		$7,400
	Common stock (1)		$50,000
	Additional paid in capital - Common stock (balancing figure)		$442,600
	(To record conversion of bonds)

Table (1)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $442,600.

Working notes:

(1)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Answer 9

1.a.

Expert Solution

Answer 10

1.a.

Expert Solution

Answer 11

Expert Solution

Answer 12

b.

To determine

Prepare journal entry to record the conversion of bonds under the market value method.

b.

Expert Solution

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Loss on Conversion (balancing figure)	$27,400
	Discount on bonds payable		$7,400
	Common stock (2)		$50,000
	Additional paid - In capital on Common stock (3)		$470,000
	(To record conversion of bonds)

Table (2)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Loss on conversion is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on conversion account for $27,400.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $470,000.

Working notes:

(2)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Calculate additional paid in capital – common stock.

(3)Calculate common stock.

$Additional paid in capital - common stock) = (Bonds payableNumber of convertible bonds × Convertible common shares × (Market value per share −Face value per share))= ($500,000$1,000) × 20 Common shares × ($52−$5)= 500 × 20× $5= $470,000$

Answer 13

b.

To determine

Prepare journal entry to record the conversion of bonds under the market value method.

Answer 14

b.

Expert Solution

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Date	Account Titles and Explanation	Debit	Credit
July 3, 2017	Bonds payable	$500,000
	Loss on Conversion (balancing figure)	$27,400
	Discount on bonds payable		$7,400
	Common stock (2)		$50,000
	Additional paid - In capital on Common stock (3)		$470,000
	(To record conversion of bonds)

Table (2)

Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $500,000.
Loss on conversion is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on conversion account for $27,400.
Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $7,400.
Common stock is a component of stockholders’ equity, and it is increased. Therefore, credit common stock account for $50,000.
Additional paid in capital on common stock is a component of stockholders’ equity, and it is increased. Therefore, credit additional paid in capital on common stock account for $470,000.

Working notes:

(2)Calculate common stock.

$Common stock = (Bonds payableNumber of convertible bonds × Convertible common shares × Face value per share)= ($500,000$1,000) × 20 Common shares × $5= 500 × 20× $5= $50,000$

Calculate additional paid in capital – common stock.

(3)Calculate common stock.

$Additional paid in capital - common stock) = (Bonds payableNumber of convertible bonds × Convertible common shares × (Market value per share −Face value per share))= ($500,000$1,000) × 20 Common shares × ($52−$5)= 500 × 20× $5= $470,000$

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

2.

To determine

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

2.

Expert Solution

Explanation of Solution

Compute debt to equity ratio before the conversion.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600$3,000,000= 0.831$

Compute debt to equity ratio after conversion accounted for with book value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$492,600= $2,000,000$3,492,600= 0.573$

Compute debt to equity ratio after conversion computed for with market value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$520.000−$27,400= $2,000,000$3,492,600= 0.573$

Answer 19

2.

To determine

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

Answer 20

2.

Expert Solution

Explanation of Solution

Compute debt to equity ratio before the conversion.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600$3,000,000= 0.831$

Compute debt to equity ratio after conversion accounted for with book value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$492,600= $2,000,000$3,492,600= 0.573$

Compute debt to equity ratio after conversion computed for with market value method.

$Debt to equity ratio = Total liabilitesTotal stockholders' equity= $2,492,600−$492,600$3,000,000 +$520.000−$27,400= $2,000,000$3,492,600= 0.573$

Answer 21

2.

Expert Solution

Answer 22

2.

Expert Solution

Answer 23

Expert Solution

Answer 24

3.

To determine

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

3.

Expert Solution

Explanation of Solution

Date	Account Titles and Explanation	Debit	Credit
July 2, 2021	Cash	$487,500
	Bonds payable		$465,000
	Share premium conversion equity (4)		$22,500
	(To record issuance of bonds payable)

Table (3)

Cash is a current asset, and it is increased. Therefore, debit cash account for $487,500.
Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $465,000.
Share premium conversion equity is a component of stockholders’ equity, and it is increased. Therefore, credit share premium conversion equity account for $22,500.

Working note:

(4)Calculate share premium conversion equity.

$Share premium conversion equity )= (Bonds payableNumber of convertible bonds × (Fair value of conversion option))= ($500,000$1,000) × $45= 500 ×$45= $22,500$

Answer 25

3.

To determine

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

Answer 26

3.

Expert Solution

Explanation of Solution

Date	Account Titles and Explanation	Debit	Credit
July 2, 2021	Cash	$487,500
	Bonds payable		$465,000
	Share premium conversion equity (4)		$22,500
	(To record issuance of bonds payable)

Table (3)

Cash is a current asset, and it is increased. Therefore, debit cash account for $487,500.
Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $465,000.
Share premium conversion equity is a component of stockholders’ equity, and it is increased. Therefore, credit share premium conversion equity account for $22,500.

Working note:

(4)Calculate share premium conversion equity.

$Share premium conversion equity )= (Bonds payableNumber of convertible bonds × (Fair value of conversion option))= ($500,000$1,000) × $45= 500 ×$45= $22,500$

Answer 27

3.

Expert Solution

Answer 28

3.

Expert Solution

Answer 29

Expert Solution

Answer 30

Ch. 14 - Prob. 1GI Ch. 14 - Why does issuing debt result in an income tax...Ch. 14 - What is a bond? Define face value, maturity date,...Ch. 14 - What is the difference between a mortgage bond and...Ch. 14 - Prob. 5GI Ch. 14 - Prob. 6GI Ch. 14 - Prob. 7GI Ch. 14 - Prob. 8GI Ch. 14 - Prob. 9GI Ch. 14 - Prob. 10GI

Prepare journal entry to record the conversion of bonds under book value method.

Videos

Prepare journal entry to record the conversion of bonds under book value method.

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Explanation of Solution

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

Explanation of Solution

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.

Explanation of Solution

Want to see more full solutions like this?

Chapter 14 Solutions

Prepare journal entry to record the conversion of bonds under book value method.

Videos

Prepare journal entry to record the conversion of bonds under book value method.

Explanation of Solution

Prepare journal entry to record the conversion of bonds under the market value method.

Explanation of Solution

Calculate the company’s debt equity ratio under each alternative method described in the chapter 6. Assume the company other liabilities are $2,000,000 and shareholders’ equity before conversion is $3,000,000.

Explanation of Solution

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2nd July 2021.

Explanation of Solution

Want to see more full solutions like this?

Chapter 14 Solutions

Prepare journal entry to record issuance of bonds, assume the company uses IFRS and issued the bonds for $487,500 on 2^nd July 2021.