Fall 2010 Class 4

Par value of the bond 1000000 par 1000000 unamortized

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Unformatted text preview: es 1,058,942 1,058,942 * 985,942=1,000,000-14,058 Example of Induced Early Conversion (by the issuer) • Assume the company wishes to reduce interest costs Assume and offers bond holders $15,000 cash premium to $15,000 convert the bonds into common shares before they mature. – – – – Par value of the bond = $1,000,000 Par $1,000,000 unamortized discount = $27,524 . unamortized $27,524 the carrying value of the bond = $972,476, the $972,476 the fair value of the bond is $981,462 (not including the the of $981,462 conversion feature). conversion – Conversion option was originally valued at $75,939, Conversion $75,939 using incremental method. using – The firm use book-value approach to record bond The book-value conversion conversion Example of Induced Early Conversion • Step 1: Determine how much of the $15,000 Step premium should be allocated as bonds retirement costs. retirement FV-BV=981,462-972,476=8,986 FV-BV= • Step 2: The residual is allocated as share Step redemption costs redemption 15,000-8,986=6,041 Induced Early Conversion • Journal entry to record induced conversion: Bond Payable Expense—debt retirement cost Contributed Surplus-Stock options Contributed Retained Earnings Common Shares Cash 972,476* 972,476* 8,986 75,939 75,939 6,014 1,048,415** 15,000 15,000 * 972,476=1,000,000-...
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This note was uploaded on 03/15/2012 for the course BUS 303 taught by Professor Brown during the Spring '11 term at Simon Fraser.

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