PART I CONVERTIBLE DEBT, HISTORICAL COST ACCOUNTING ABC Co received $1,000 in cash proceeds from the issuance of $1,000 of 2 , 10 year convertible bonds on Jan 1, Year 1 Interest is payable annually on December 31 ABC uses effective interest amortization ABC can settle this debt with any combination of stock or cash equivalent to the conversion value The market rate of interest for similar credit quality non convertible debt is 3 On Jan 1, Year 6, with 5 years to maturity, the investors decide to convert The $1,000 bond can be converted into 10 shares of $5 par value common stock PV of Bonds on 1 1 YR1 $915 FV 1000, PMT 20, N 10, i 3 PV of Bonds on 1 1 YR2 $922 FV 1000, PMT 20, N 9, i 3 Hint you can use this number to check that your calculator is set up correctly REQUIRED Fill in the blanks below Round your answers to the nearest dollar Do NOT put a dollar sign in front of the number you input You can use a comma to separate the digits For Bonds Payable, put in the net number, i e , Bonds Payable net of any discount or premium) The debt issuance JE on 1 1 YR 1 includes the following Income Statement for Year 2 reflects The conversion JE on Jan 1, Year 6, with N 5, includes the following Cr Bonds Payable (net of discount or premium) Year 2 Interest Expense Dr Bonds Payable (net of discount or premium) Cr Equity Options Cr Additional Paid in Capital Common Stock PART II DEBT W DETACHABLE WARRANT, HISTORICAL COST ACCOUNTING Now assume ABCs debt (Face Value $1,000, stated rate 2 , N 10) is a debt with 2 detachable warrants The company received $1,000 from the issuance Each warrant allows the holder to purchase 10 share of $5 par common stock for a total of $140 (so if both warrants are exercised then the holder pays the company $280) On the date of grant, the bonds are trading at $900 and warrants at $50 each Both warrants are exercised on Jan 1, Year 6 and converted into common stock The debt issuance JE on 1 1 YR 1 includes the following Income Statement for Year 2 reflects JE for the conversion of WARRANTS on Jan 1, Year 6, with N 5, includes the following Cr Bonds Payable (net of discount or premium) Year 2 Interest Expense Dr Cash Cr Equity Options Cr Additional Paid in Capital Common Stock

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PART I: CONVERTIBLE DEBT, HISTORICAL COST ACCOUNTING ABC Co. received $1,000 in cash proceeds from the issuance of $1,000 of 2%, 10-year convertible bonds on

PART I: CONVERTIBLE DEBT, HISTORICAL COST ACCOUNTING

ABC Co. received $1,000 in cash proceeds from the issuance of $1,000 of 2%, 10-year convertible bonds on Jan. 1, Year 1. Interest is payable annually on December 31. ABC uses effective interest amortization. ABC can settle this debt with any combination of stock or cash equivalent to the conversion value. The market rate of interest for similar credit-quality non-convertible debt is 3%.

On Jan. 1, Year 6, with 5 years to maturity, the investors decide to convert. The $1,000 bond can be converted into 10 shares of $5 par value common stock.

PV of Bonds on 1/1/YR1 = $915 [FV=1000, PMT=20, N=10, i=3%]

PV of Bonds on 1/1/YR2 = $922 [FV=1000, PMT=20, N=9, i=3%]

Hint: you can use this number to check that your calculator is set up correctly.

REQUIRED: Fill in the blanks below. Round your answers to the nearest dollar. Do NOT put a dollar sign in front of the number you input. You can use a comma to separate the digits. For Bonds Payable, put in the net number, i.e., Bonds Payable net of any discount or premium).

The debt issuance JE on 1/1/YR 1 includes the following:	Income Statement for Year 2 reflects	The conversion JE on Jan.1, Year 6, with N=5, includes the following:
Cr. Bonds Payable (net of discount or premium)	Year 2 Interest Expense =	Dr. Bonds Payable (net of discount or premium)
Cr. Equity - Options		Cr. Additional Paid in Capital - Common Stock

PART II: DEBT W/ DETACHABLE WARRANT, HISTORICAL COST ACCOUNTING

Now assume ABCs debt (Face Value =$1,000, stated rate = 2%, N=10) is a debt with 2 detachable warrants. The company received $1,000 from the issuance. Each warrant allows the holder to purchase 10 share of $5 par common stock for a total of $140 (so if both warrants are exercised then the holder pays the company $280). On the date of grant, the bonds are trading at $900 and warrants at $50 each. Both warrants are exercised on Jan. 1, Year 6 and converted into common stock.

The debt issuance JE on 1/1/YR 1 includes the following:	Income Statement for Year 2 reflects	JE for the conversion of WARRANTS on Jan.1, Year 6, with N=5, includes the following:
Cr. Bonds Payable (net of discount or premium)	Year 2 Interest Expense =	Dr. Cash
Cr. Equity - Options		Cr. Additional Paid in Capital - Common Stock