Reference no: EM132908690
On January 1, 2019, when its $30 par value common stock was selling for $80 per share, Waterway Corp. issued $11,400,000 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 $12,312,000. The present value of the bond payments at the time of issuance was $9,690,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2020, 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, 2021, 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.
Problem 1: Prepare the entry to record the original issuance of the convertible debentures.
Problem 2: Prepare the entry to record the exercise of the conversion option, using the book value method.
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