Problem: At the beginning of 2011, P Corporation is considering the issuance of 100,000 worth five year bonds. Two alternatives are under consideration as follows:
a) Issue 100 convertible bonds, the conversion option allows the holder of each 1,000 bond, to convert the bonds to 15 shares of S common stock, par $10 at any time during the second year. The bonds could be sold for 108,000
b) Issue 800 nonconvertible 1000 bonds with 15 detachable stock purchase warrants per bond. Each warrant can be tendered for one share of S common stock par $10, at an option price of $60. The warrants are expected to have a market value of $2 each immediately after the issuance of the bonds; the bonds do not have a listed market price.
P's management is considering which alternative to select. Your assistance in selecting the alternative has been requested. You should consider the comparative impact of the two alternatives on the financial statements.
Instructions:
a. Give the journal entries for each alternative. Explain any differences in accounting values between the alternatives
b. Give the entries for each alternative that P would make, assuming that
- All convertible bonds are tendered for conversion after the second year
- All warrants are turned in for shares in alternative B, after the second year
- P corporation is using straight line amortization for any premium or discount on bonds