Convertible Debt, Three Cases: The following cases are independent: Case A On 1 November 20X1, Bertha Builders
Question:
Convertible Debt, Three Cases: The following cases are independent:
Case A
On 1 November 20X1, Bertha Builders Limited issued a convertible bond that was convertible in 15 years' time into 78,000 common shares at the investor's option. The bond had a \(\$ 5,000,000\) par value, and \(7 \%\) interest was paid semi-annually on 1 November and 1 May.
The bond sold for \(\$ 5,200,000\) when the market interest rate was \(8 \%\).
Required:
Provide entries on issuance and on 31 December 20X1, the fiscal year-end.
Case B
On 1 January 20X1, Pong Lake Resources Limited issued a bond when market interest rates were \(8 \%\). Bonds payable, \(\$ 10,000,000,8 \%\), due in 20 years' time. The bonds pay interest semi-annually each 30 June and 31 December. The bonds were issued at 104 . The bonds are mandatorily convertible at the company's discretion into common shares at the rate of six shares for each \(\$ 100\) bond at maturity. The company may, at its discretion, repay the bond for cash in lieu of shares.
Required:
What would appear on the SFP in relation to the bond as of 1 January \(20 \mathrm{X} 1\) ? What would be recorded as interest expense for the year ended 31 December 20X1? Provide accounts and amounts.
Case C
On the 31 October 20X1 SFP, Cherub Metalworks Limited reported the following:
Interest is paid annually on 31 October and the bonds were originally valued to yield \(14 \%\).
Required:
1. Provide entries on 31 October 20X2 to record interest and show the conversion of the bonds to common shares on this date. The market price of common shares was \(\$ 11\) per share on 31 October \(20 \mathrm{X} 2\).
2. Assume instead that the bond is repurchased on the open market on 31 October \(20 \mathrm{X} 2\) and retired. The price paid was \(\$ 6,020,000\), of which \(\$ 25,000\) related to the option. Journalize the transaction.
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