Reference no: EM132326045

Question

On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Vaughn Corp. issued $11,800,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the corporation's common stock.

The debentures were issued for $12,744,000. The present value of the bond payments at the time of issuance was $10,030,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, the corporation's $30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly.

On January 1, 2018, when the corporation's $15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums.

Prepare the entry to record the exercise of the conversion option, using the book value method.

You need to create a journal entry. So far, this is what you have.

Bonds Payable 354,000

Discount on Bonds Payable

Common Stock

Paid in capital in excess of par-common stock