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Convertible bonds and stock warrants

For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions.

1) On August 1, 2007, Ryan Corporation called its 10% convertible bonds for conversion. The $8,000,000 par bonds were converted into 320,000 shares of $20 par common stock. On August 1, there was $700,000 of unamortized premium applicable to the bonds. The fair market value of the common stock was $20 per share. Ignore all interest payments.

2) Garnett, Inc. decides to issue convertible bonds instead of common stock. The company issues 10% convertible bonds, par $3,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94.

3) Lopez Company issues $5,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $4,935,000 and the value of the warrants is $315,000. The bonds with the warrants sold at 101.

Solution Preview

1. Bonds Payable Dr ...................... 8,000,000
Premium on Bonds Payable Dr........... 700,000
Common Stock (320,000X20)Cr..................6,400,000
Paid-in Capital in Excess of Par Cr 2,300,000

When bonds are converted, they are done at the book value. The carrying value of the bonds is taken. The capital stock is the number of shares issued and the difference is ...

Solution Summary

The solution explains journal entries relating to convertible bonds and stock warrants.

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