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On January 1, 2014, Poundstone Inc. issued $1,000,000, 5%, 10-year convertible debentures. Issues of Poundstone’s risk...

On January 1, 2014, Poundstone Inc. issued $1,000,000, 5%, 10-year convertible debentures. Issues of Poundstone’s risk class are typically traded at 6%. Each $1,000 bond is convertible into 20 shares of Poundstone’s $1 par value common stock. The stock was trading at $45 on the day the bonds were issued.

A. Record the journal entry for the convertible bond issue under both IFRS and US GAAP.

B. If the stock price were trading at $70 on the day the bonds were issued, provide any alterations to your journal entries in A.

C. If 30% of the bonds exercised their conversion option on January 1, 2015, record the conversion of securities assuming Poundstone uses the i) book value method or ii) market value method. Assume Poundstone’s common stock was trading at $40 a share on 1/1/15. Use US GAAP.

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Answer #1

A. Journal entry to record Convertible bonds

5% Convertible debentures A/c Dr 1,000,000

To Stock/ Share capital A/c (1,000,000/1000*20*1) 20,000

To Securities Premium A/c (20000*44) 880,000

To Dicount on issue of Shares (20000*5) 100,000

( Being 1000000 convertible debentures converted into stock)

b. It the price is $70

5% Convertible debentures A/c Dr 1,000,000(20000*50)

Premium on redemption of debenturesA/c Dr 380,000(20000*19)

To Stock/ Share capital A/c (1,000,000/1000*20*1) 20,000

To Securities Premium A/c (20000*69) 1,360,000

( Being 1000000 convertible debentures converted into stock)

c. If only 30% exercised the option

5% Convertible debentures A/c Dr 1,000,000

To Stock/ Share capital A/c (1,000,000/1000*30%*20*1) 6000

To Securities Premium A/c (6000*49) 294,000

To Cash / Bank A/c 700,000

( If it follows Book value method)

  

5% Convertible debentures A/c Dr 1,000,000

To Stock/ Share capital A/c (1,000,000/1000*30%*20*1) 6,000

To Securities Premium A/c (6000*44) 264,000

To Dicount on issue of Shares (6000*5) 30,000

To Cash A/c 700,000

( IF it foolows market value method)

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