Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 107

Bonds payable—convertible O’Kelley Co. has outstanding $2 million face amount of 12% bonds that were issued on January 1, 2002, for $2 million. The 20-year bonds were issued in $1,000 denominations and mature on December 31, 2021. Each $1,000 bond is convertible at the bondholder’s option into five shares of $10 par value common stock.

Required:

a. Under what circumstances would O’Kelley Co.’s bondholders consider converting the bonds?

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b. Assume that the market price of O’Kelley Co.’s common stock is now $215 and that a bondholder elects to convert 400 $1,000 bonds. Use the horizontal model (or write the journal entry) to show the effect of the conversion on O’Kelley Co.’s financial statements.

Step 1 of 4

Bonds Payable – Convertible: Convertible bonds are those bonds which can be exchanged for the shares of the organization that issued those bonds.

Bonds Payable : Bonds payable is a type of long-term liability or debt that has a fixed interest rate and a specified maturity.