REVIEW QUESTIONS :

Vargo Limited had $2.4 million of bonds payable outstanding and the unamortized premium for these bonds amounted to $44,500. Each $1,000 bond was convertible into 20 preferred shares. All bonds were then converted into preferred shares. The Contributed SurplusConversion Rights account had a balance of $22,200. Assume that the company follows IFRS.

Instructions

(a)

Assuming that the book value method was used, what entry would be made?

(b)

Assume that Vargo Ltd. offers $9,000 to induce early conversion. What journal entry would be made?

(c)

From the perspective of the bondholders, what is the likely motive for the conversion of bonds into preferred shares? What are the advantages of each investment that are given up or obtained by the bondholders who chose to convert their investment?

Dadayeva Inc. has $5 million of 6% convertible bonds outstanding. Each $1,000 bond is convertible into 50 no par value common shares. The bonds pay interest on January 31 and July 31. On July 31, 2017, the holders of $1,250,000 of these bonds exercised the conversion privilege. On that date, the market price of the bonds was 110, the market price of the common shares was $40, the carrying value of the common shares was $20, and the Contributed SurplusConversion Rights account balance was $700,000. The total unamortized bond premium at the date of conversion was $362,990. The remaining bonds were never converted and were retired when they reached the maturity date. Assume that the company follows IFRS.

Instructions

(a)

Assuming that the book value method was used, record the conversion of the $1,250,000 of bonds on July 31, 2017.

(b)

Prepare the journal entry that would be required for the remaining amount in Contributed SurplusConversion Rights when the maturity of the remaining bonds is recorded.

(LO4)

On January 1, 2017, when the fair value of its common shares was $80 per share, Hammond Corp. issued $10 million of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five common shares. The debentures were issued for $10.8 million. The bond payment's present value at the time of issuance was $8.5 million and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2018, the corporation's common shares were split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2019, when the fair value of the corporation's common shares was $135 per share, holders of 30% of the convertible debentures exercised their conversion option. Hammond Corp. applies ASPE, and uses the straight-line method for amortizing any bond discounts or premiums.

Instructions

(a)

Prepare the entry to record the original issuance of the convertible debentures.

(b)

Using the book value method, prepare the entry to record the exercise of the conversion option. Show supporting calculations in good form.

(c)

How many shares were issued as a result of the conversion?

(d)

From the perspective of Hammond Corp., what are the advantages and disadvantages of the conversion of the bonds into common shares?

(e)

Assume, instead, that Hammond Corp. decides to retire the bonds early, on January 1, 2019, by paying cash of $3,306,000 to the bondholders. On that date, the fair value of a similar bond without the conversion feature is $870 per bond. Prepare the journal entry using the book value method.