Problem - Conversion of Bonds
On January 1, 2010, when its $45 par value common stock was selling for $119 per share, Bartz Corp. issued $14,900,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,490 bond to convert the bond into five shares of the corporation's common stock. The debentures were issued for $15,794,000. The present value of the bond payments at the time of issuance was $12,665,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2011, the corporation's $45 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2012, when the corporation's $22 par value common stock was selling for $201 per share, holders of 20% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
(a) Prepare in general journal form the entry to record the original issuance of the convertible debentures.
(b) Complete the two schedules below and prepare in general journal form the entry to record the exercise of the conversion option, using the book value method.