Ch14 Long term Liabilities Bond and Notes Additions

Convertible BondsSome bonds may be converted into common stock at the options of the holder.. When bonds are converted the issuer updates interest expense and amortization of discount

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Convertible Bonds

Some bonds may be converted into common

stock at the options of the holder When bonds are converted the issuer updates interest expense and amortization of discount

or premium to the date of conversion The

bonds are reduced and shares of common

stock are increased.

Bonds into Stock

Record new stock at the book value of the convertible

bonds No gain or loss is recognized.

On December 31, 2006, all of the bondholders of Matrix, Inc convert their bonds into common stock There are 10,000 bonds outstanding with a face value of $1,000 each Each bond is convertible into 50 shares of the company’s $1 par value common stock There is

$1,500,000 on unamortized discount associated with the

bonds that are converted Interest and discount

amortization have been brought up to December 31

Let’s look at the entry to record the conversion

On December 31, 2006, all of the bondholders of Matrix, Inc convert their bonds into common stock There are 10,000 bonds outstanding with a face value of $1,000 each Each bond is convertible into 50 shares of the company’s $1 par value common stock There is

$1,500,000 on unamortized discount associated with the

bonds that are converted Interest and discount

amortization have been brought up to December 31

Let’s look at the entry to record the conversion

Convertible Bonds

10,000 × 50 shares × $1 par value

10,000 × 50 shares × $1 par value

The carrying value of the bonds is

assigned to the stock.

purchase a stated number of shares at a

specified price within a specified period of time

and the warrants using market values

Ex: Illustration 14-19, p.823

If one-half of the warrants (1 million) are

exercised when the market value of HTL’s

common stock (1$ par) is $30 per share, how

do we record?

-Cash (1,000,000 warrants × $25) 25

Equity—stock warrants (1,000,000 warrants × $3) 3

Common stock (to balance) 1 PIC, exceed par ……… ………27