Question

Shields Corporation sells $5,000,000 of 8% convertible bonds on July 1, 2014 for $5,350,000. The bonds mature on July 1, 2029 and pay interest semi-annually on July 1 and December 31. Each $1,000 bond is convertible into 50 common shares at the investor's option at maturity. The market (yield) rate is 9%.

a) Calculate the stated conversion price?
b) Prepare the journal entry at issuance using the incremental method.
c) Investor's decided to convert all of their bonds at maturity on July 1, 2029 after interest is paid. Record the conversion.
d) Assume that instead of part (c) the investors decided not to exercise their conversion rights at maturity, July 1, 2029, after interest is paid. Make the entry on Shield Corporation's books.

Answer 1

The stated conversion price of Shields Corporation's bonds is $20 per share. The journal entry at issuance records cash and credits bonds payable and premium on bonds payable. For bond conversion at maturity, the entry debits bonds payable and premium, crediting common stock and additional paid-in capital; if not converted, it records repayment of the bond principal and final interest.

Step-by-step explanation:

The subject of this question pertains to the field of business, specifically related to accounting and financial management of convertible bonds.

Calculation of the Stated Conversion Price

The stated conversion price for each bond can be calculated by taking the face value of the bond ($1,000) and dividing it by the number of common shares into which it is convertible (50 shares). Therefore, the stated conversion price is $1,000 / 50 shares = $20 per share.

Journal Entry at Issuance

Using the incremental method, the journal entry at issuance of the bonds would involve debiting cash for $5,350,000 which is the amount the bonds were sold for, and crediting bonds payable for $5,000,000 which is the face value of the bonds, and the premium on bonds payable for $350,000, which is the amount in excess of the face value ($5,350,000 - $5,000,000).

Record the Conversion at Maturity

The journal entry to record the conversion at maturity, assuming all bondholders choose to convert, would involve debiting bonds payable for the face value of the bonds, debiting the premium on bonds payable for any remaining balance, and crediting common stock for the par value of the common shares issued and paid-in capital in excess of par for the remainder.

Entry if No Conversion at Maturity

If the investors decide not to exercise their conversion rights at maturity, the journal entry would involve debiting bonds payable and crediting cash for the face value of the bonds, plus debiting interest expense and crediting cash for the final interest payment.