Johannesburg Corp. has two issues of securities outstanding: no par value common shares and 8% convertible bonds with a par value of $ 8,000,000. Bond interest payment dates are June 30 and December 31. The conversion clause in the bond indenture entitles the bondholders to receive 40 common shares in exchange for each $ 1,000 bond. The value of the equity portion of the bond issue is $ 60,000. On June 30, 2020, the holders of $ 1,200,000 par value bonds exercise the conversion privilege. The market price of the bonds on that date is $ 1,100 per bond and the market price of the common shares is $ 35. The total unamortized bond discount at the date of conversion is $ 500,000. In applying the book value method, what amount should Johannesburg credit to Common Shares as a result of this conversion?
A) $ 1,284,000
B) $ 1,134,000
C) $ 1,125,000
D) $ 1,116,000

Question

Quizplus · Accepted Answer

1. First, calculate the number of shares that can be obtained from the bonds: $1,200,000 par value bonds / $1,000 per bond * 40 shares per bond = 48,000 shares
2. Since the market price of the bonds is $1,100 and the par value is $8,000,000, the total amount of bonds outstanding is $1,100 per bond * 8,000 bonds = $8,800,000.
3. The total amount of equity that can be obtained from the bonds is $60,000, which represents the portion of the bond issue that is attributable to equity.
4. Therefore, the total amount of equity that will be received in exchange for the bonds is $60,000 / $8,800,000 * $1,200,000 = $8,182.
5. The amount to be credited to common shares is the market value of the shares received, which is 48,000 shares * $35 per share = $1,680,000.
6. The bond discount is also amortized at the time of conversion: $500,000 unamortized bond discount / $1,200,000 par value bonds = $0.42 per bond. The total amount of bond discount amortized is therefore $0.42 per bond * 1,200 bonds = $504.
7. The entry to record the conversion is: 
   Common Shares $1,680,000 
   Discount on Bonds Payable $504 
   Bonds Payable $1,200,000 
   To record conversion of bonds into common shares