Angus Corporation (AC) has decided to expand its business and needs to raise some money. The owners are not interested in giving up any ownership in the business immediately, so desire to issue bonds to raise the necessary capital to expand. AC engages some investment bankers, lawyers and accountants to help sell the bonds and to issue audited financial statements in support of the bonds. Each of the service providers has agreed to hold off on being paid their fees until the bonds are issued and AC has some extra cash to pay them. AC prices and issues the bonds on the same day, July 1, 2017. Total face value of the issued bonds is $100 million. Cash received on the bonds by AC after all fees are paid was $98 million. The current market interest rate is 9% and AC's bonds are paying a 9.75% stated rate. The bonds were issued at 102. The bonds have interest only payments due every July 1 and January 1. Built into the terms of the bond offering was a "call" feature by which AC can require the bond holders to sell the bonds back to AC for a price of 103 if the redemption occurs before the 5th anniversary of the issuance date, 102 if the redemption occurs between the 5th anniversary and the 8th anniversary and 101 if the redemption occurs between the 8th anniversary and before the redemption date. The bonds carry a 10 year term with all of the outstanding principle due on the 10th anniversary of the issuance date. AC uses a December 31 year end. AC has adopted accounting policies such that Discounts or Premiums are amortized over the life of the bonds using the effective interest method, however all other costs, if any, are amortized using the straight line method. The bonds are convertible into common stock at the election of the bond holder. The market value of the common stock of AC on July 1, 2017 was $28/share. The conversion allows the bond holder to exchange each $1,000 of bonds owned for 40 shares of common stock. On August 15, 2018, AC decides to redeem all of the bonds outstanding and exercises its call rights and repurchases all of the outstanding bonds.
1. Calculate and present all necessary journal entries for each of the following periods. You MUST show all of your supporting calculations.
2. Present the bond section of the balance sheet in proper format as of:
a. December 31, 2017
b. June 30, 2018
3. Comment on the accounting for the conversion feature and provide all necessary journal entries to support your position.