TR15-2 Convertible Debt, Investor's Option (LO 15-3)

Closed Tech Ltd. issued convertible bonds on 1 July 20X8. The 15-year, 5% $10,000,000 bonds pay interest semi-annually each 30 June and 31 December. At the investors option, each $1,000 bond is convertible into 50 common shares on the bonds maturity date. Bond market analysts indicated that if the bonds had not been convertible, they would likely have sold to yield 6%, and have raised $9,020,000. They were, in fact, issued for $10,350,000.

(PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.) Required: 1. Provide the journal entry to record the initial issuance of the bond. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round time value factor to 3 decimal places.)

2. Provide the entry to record interest at 31 December 20X8. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round time value factor to 3 decimal places.)

3. Prove that the $9,020,000 reference price provides a yield of 6% by establishing the present value of the bond. Allow for rounding. (Round time value factor to 3 decimal places.)

Journal entry worksheet Record the entry for issuance of bonds. Note: Enter debits before credits. Transaction General Journal Debit Credit No journal entry required Bonds payable Cash Contributed capital: common share conversion rights Discount on bonds payable Record er w general journal Journal entry worksheet Record the interest expense on the bond. Note: Enter debits before credits Transaction General Journal Debit Credit No journal entry required Bonds payable Cash Discount on bonds payable Interest expense Record ent View general journal 3. Prove that the $9,020,000 reference price provides a yield of 6% by establishing the present value of the bond. Allow for rounding. (Round time value factor to 3 decimal places.) Present value of principal Present value of interest Price