Question

E16-4B (L01) (Conversion of Bonds) On July 1, 2016, when its $1 par value common stock was selling for $66 per share, Indy Hotels Corp. issued $25,000,000 of 6% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into 10 shares of the corporation’s common stock. The debentures were issued for $26,500,000. The corporation believes the difference between the par value and the amount paid is attributable to the conversion feature. On January 1, 2017, the corporation’s common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2018, when the corporation’s $0.50 par value common stock was selling for $38 per share, holders of 10,000 of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums.

Instructions

1. Prepare in general journal form the entry to record the original issuance of the convertible debentures.
2. Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method.

Show supporting computations in good form.

Answer 1