Chapter 16: Convertible Debt

Question 1

Pumpkin Corporation issues a $100,000 convertible bond that is convertible to 2,000 shares of common stock with $1 par value. Investors purchase the bond for $110,000.

How does Pumpkin Corporation record the issuance?

Answer 1

Dr. Cash 110,000
Cr. Bonds Payable 100,000
Cr. Premium on Bonds Payable 10,000

Question 2

An investors exercises its conversion rights on a $100,000 convertible bond that is convertible to 2,000 shares of common stock with $1 par value.

The premium on the bond payable is 4,000. How does Pumpkin Corporation record the conversion?

Answer 2

Dr. Bonds Payable (L) 100,000
Dr. Premium on Bonds Payable (L) 4,000
Cr. Common Stock, at $1 par (SE) 2,000
Cr. APIC – Common Stock (SE) 103,000

Question 3

ABC corporation entices investors with a $50,000 offer to debt holder to exercise its conversion rights.

In response, an investors exercises its conversion rights on a $100,000 convertible bond that is convertible to 2,000 shares of common stock with $1 par value.

The premium on the bond payable is 4,000. How does Pumpkin Corporation record the conversion?

Answer 3

Dr. Debt Conversion Expense 50,000
Dr. Bonds Payable (L) 100,000
Dr. Premium on Bonds Payable (L) 4,000
 Cr. Common Stock, at $1 par (SE) 2,000
 Cr. APIC – Common Stock (SE) 103,000
 Cr. Cash 50,000

Question 4

Pumpkin Corporation pays $106,000 in full retirement of the convertible bond which at the time of retirement, showed a $4,000 premium on bond payable.

How would Pumpkin Corporation record the transaction?

(Note: security is a $100,000 convertible bond that is convertible to 2,000 shares of common stock with $1 par value)

Answer 4

Dr. Bonds Payable (L) 100,000
Dr. Premium on Bonds Payable (L) 4,000
Dr. Loss on retirement of debt (I/S) 2,000
Cr. Cash 106,000