PanaTile Ltd. issued subordinated bonds payable on 1 January 20X1, when the market interest rate was 6%. The company received $10,760,000 for the bonds. The bonds were $10,000,000 of 4% subordinated convertible debentures payable, with interest payable semi-annually. These bonds were convertible at the investors option in 15 years time into common shares of the company at the rate of 25 shares for each $1,000 bond issued.

Required:

1) At what price would the bonds be issued if they were not convertible?

2) Explain the method used to value the conversion option.

3) Provide the entry to record issuance of the bond on 1 January 20X1.

4) Provide the journal entry to record interest on 30 June 20X1. Use the effective interest method to record discount amortization.

5) Provide the entry to record bond conversion to common shares at maturity, on 31 December 20X10. Common shares had a fair value of $44 per share at this time.

6) Assume instead that the bond was repaid in cash at maturity. Provide all entries to record the repayment/bond maturity. If repayment is in cash, what fair value for common shares is implied?