What is the difference between shares and bonds?

Help with Conversion of Bonds Question?

• On January 1, 2010, when its $41 par value common stock was selling for $108 per share, Bartz Corp. issued $13,500,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,350 bond to convert the bond into five shares of the corporation's common stock. The debentures were issued for $14,310,000. The present value of the bond payments at the time of issuance was $11,475,000, 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 $41 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 $20 par value common stock was selling for $182 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. (a) Prepare in general journal form the entry to record the original issuance of the convertible debentures. (b) Complete the two schedules and prepare in general journal form the entry to record the exercise of the conversion option, using the book value method. Recording the conversion:

• Answer:

  Under GAAP - (a) DR Cash 14,310,000 CR Bonds Pay 13,500,000 CR Bond Premium 810,000 (b) Unamortized Bond Premium = 729,000; 20% = 145,800 Conversion ratio - 10 shs per 1,350 Bond, 2,000 Bonds converted = 20,000 shares DR Bond Premium 145,800 DR Bonds Pay 2,700,000 CR Common Stock (Par Value $20 x 20,000 shs) 400,000 CR Capital Surplus (to balance) 2,445,800