Question

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

Answer 1

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.