A15-11 Convertible Debt; Investor Option versus Conversion Mandatory (LO 15-3, 15-4)

AMC Limited issued five-year, 5% bonds for their par value of $870,000 on 1 January 20X1. Interest is paid annually. The bonds are convertible to common shares at a rate of 50 common shares for every $1,000 bond. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.) Required: 1. Assume that the bonds were convertible at the investors option and that the conversion option was valued at $71,340.

a. Provide the journal entry on issuance. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Calculate interest expense for each year of the bonds five-year life. Use an interest rate of 7% for this requirement. (Round your intermediate calculations and final answers to the nearest whole dollar.)

c. Provide the journal entry to record maturity of the bond assuming shareholders convert their bonds to common shares. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

d. Assume instead that the bonds were repaid for $915,600 after interest was paid in Year 3. Provide the journal entry for retirement, assuming $70,340 of the payment related to the option and the rest related to the bond. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to the nearest whole dollar.)

2. Assume that the bonds were mandatorily convertible at maturity. a. Calculate the portion of the original proceeds relating to interest and the equity portion. Use a discount rate of 6%. (Round your final answers to the nearest whole dollar. Round time value factor to 5 decimal places.)

b. Provide the journal entry on issuance. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to the nearest whole dollar. Round time value factor to 5 decimal places.)