Question

Jake issued $4,000,000 of 10%, 2-year convertible bonds on 01-01-14 when the market rate for similar bonds was 10%. The bonds were dated 01-01-14 with interest payable January 01 and July 01. Jake incurred and paid $45,000 of bond issuance costs. On 07-01-14 after making its interest payments, all of the bonds were converted into 75,000 shares of G's $1 par value common stock. At the time of the conversion, one share of G's common stock was trading for $90 per share. G only prepares AJEs every December 31. The entry to record the 07-01-14 conversion will include

Answer options

A. a $3,880,000 credit to additional paid-in-capital  

B. a $3,890,391 credit to additional paid-in-capital

C. a $6,000,000 credit to common stock

D. a $3,925,000 credit to additional paid-in-capital

E. a $3,901,335 credit to additional paid-in-capital

Answer 1

At the time of issuance of bonds on 01-01-2014, amount of debt issuance costs are capitalised by deducting from the Bonds carrying amount i.e.,

Date	Account Description	Debit	Credit
01-01-2014	10% Convertible bonds	$45,000
	Cash/Bank		$45,000
	(Being debt issuance cost incurred and paid)

Now, the carrying value of bonds is $3,955,000 (i.e., $4,000,000 - $45,000).

Date	Account Description	Debit	Credit
07-01-2014	10% Convertible bonds	$3,955,000
	Common Stock (75,000 shares x $1 per share)		$75,000
	Additional paid-in-capital		$3,880,000
	(Being debt issuance cost incurred and paid)

So, the answer is A. a $3,880,000 credit to additional paid-in-capital

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