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Question 1 (29 marks)

For each of the unrelated transactions described below, present the entry(ies) required to record each transaction:

1. Flex Inc. decides to issue convertible bonds instead of ordinary shares. The company issued 8,000,000 par value 10% convertible bonds at 98. The investment banker indicates that if the bonds had not been convertible, they would have been sold at 92.

(8 marks)

2. Vaguard Company issues $5,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable share warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the fair value of the bonds without the warrants is $4,873,870. The bonds with the warrants sold at 101.

(6 marks)

3. Longmore Inc. called its convertible debt in 2010. Assume the following related to the transaction: The 11% 5,000,000 par value bonds were converted into 500,000 shares of 1 par value ordinary shares on July 1, 2010. The carrying amount of the debt on July 1 was 4,800,000. The Share PremiumConversion Equity account had a balance of 1,000,000 and the company paid an additional 35,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

(15 marks)