Question

Problem 14-19A Convertible bonds; induced conversion; bonds with detachable warrants [LO 14-5]

Bradley-Link’s December 31, 2018, balance sheet included the following items:

Long-Term Liabilities

9.0% convertible bonds, callable at 103 beginning in 2019, due 2021 (net of unamortized discount of $3) [note 8] 11.0% registered bonds callable at 106 beginning in 2025,

due 2027 (net of unamortized discount of $1.5) [note 8]

Shareholders’ Equity

Equity—stock warrants

Note 8: Bonds (in part)

($ in millions) $147

68.5 5

The 9.0% bonds were issued in 2005 at 92.0 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of the Company’s no par common stock.

The 11.0% bonds were issued in 2007 at 104 to yield 11.4%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitles the holder to purchase one share of the Company’s no par common stock for $20, beginning 2019.

On January 3, 2019, when Bradley-Link’s common stock had a market price of $27 per share, Bradley-Link called the convertible bonds to force conversion. 90% were converted; the remainder were acquired at the call price. When the common stock price reached an all-time high of $32 in December of 2019, 40% of the warrants were exercised.

Required:

1.Prepare the journal entries that were recorded when each of the two bond issues was originally

sold in 2005 and 2007.

2. Prepare the journal entry to record (book value method) the conversion of 90% of the

convertible bonds in January 2019 and the retirement of the remainder.

3. Assume Bradley-Link induced conversion by offering $150 cash for each bond converted. Prepare the journal entry to record (book value method) the conversion of 90% of the

convertible bonds in January 2019.

4. Assume Bradley-Link induced conversion by modifying the conversion ratio to exchange 45 shares for each bond rather than the 40 shares provided in the contract. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2019.

5. Prepare the journal entry to record the exercise of the warrants in December 2019.

Answer 1