Ch14 Long term Liabilities Bond and Notes Additions

14-1

WELCOME TO
MY CLASS


14-2

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


14-3

Convertible Bonds
The Book Value Method
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.


14-4

Convertible Bonds

10,000 × 50 shares × $1 par value

The carrying value of the bonds is
assigned to the stock.


14-5

Bonds with Detachable Warrants


Stock warrants give the investor an option to
purchase a stated number of shares at a
specified price within a specified period of time



The issue price is allocated between the bonds
and the warrants using market values

14-6

Bonds with Detachable Warrants
Ex: Illustration 14-19, p.823


14-7

Bonds with Detachable Warrants
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