On January 1, 20X5, Tiggly Inc. issued a $4,000,000, four-year, 3% convertible bond. Interest is paid semi-annually on June 30 and December 31. The market rate for similar non-convertible bonds when issued was 4%. Each $1,000 bond can be converted into 50 common shares. The total consideration received for the bonds was $4,150,000. What amount should be recorded to the reserves/contributed surplus account when recording the issuance of the bonds?
a. |
$146,510 |
b. |
$419,310 |
c. |
$296,510 |
d. |
$226,155 |
Solution:
Bond price of similar non convertible bonds:
Computation of bond price | |||
Table values are based on: | |||
n= | 8 | ||
i= | 2.00% | ||
Cash flow | Table Value | Amount | Present Value |
Par (Maturity) Value | 0.85349 | $4,000,000.00 | $3,413,961 |
Interest (Annuity) | 7.32548 | $60,000.00 | $439,529 |
Price of bonds | $3,853,490 |
Amount should be recorded to the reserves/contributed surplus account when recording the issuance of the bonds
= $4,150,000 - $3,853,490 = $296,510
Hence option c is correct.
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