Bonds payable-convertible
Response to the following problem:
O'Kelley Co. has outstanding $2 million face amount of 12% bonds that were issued on January 1, 2005, for $2 million. The 20-year bonds were issued in $1,000 denominations and mature on December 31, 2024. 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?
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.