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On January 1, Year 1, Spectrum Fabricators Inc. issues $20 million of convertible bonds at par value.

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On January 1, Year 1, Spectrum Fabricators Inc. issues $20 million of convertible bonds at par value. The bonds have a stated annual interest rate of 6 percent, pay interest annually, and come due December 31, Year 5. The bonds are convertible at any time after issuance at the rate of 10 shares of common stock for each $1,000 of the face value  of the convertible bonds. Issuance costs total $100,000. The current market interest rate for nonconvertible bonds is 8 percent.


Required:
Prepare the journal entries to record the issuance of the convertible bonds (round to the nearest dollar). Determine the amount of expense related to the convertible bonds that the company should recognize each year (round to the nearest dollar). Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
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Spectrum Fabricators Inc must split the convertible bonds and the issuance costs into separate liability and equity components The fair value of the l...View the full answer


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Callable bond: A bond that can be redeemed by the issuer before the maturity date, potentially leaving the bondholder without future interest payments. They usually offer higher yields than non-callable bonds. Puttable bond: A bond that gives the bondholder the right to sell the bond back to the issuer before the maturity date, providing flexibility to the bondholder. They typically offer lower yields than non-puttable bonds. Convertible bond: A bond that can be converted into a predetermined number of shares of the issuing company\'s common stock at the bondholder\'s discretion. They offer the potential for capital appreciation in addition to periodic interest payments and typically offer lower yields than non-convertible bonds. Zero coupon bond: A bond that does not pay periodic interest payments, but instead is sold at a deep discount to its face value and redeemed at face value upon maturity, providing a capital gain to the investor. They are often used to fund long-term projects and have longer maturities than other bonds.

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