a convertible bond allows the bondholder to exchange the bond for: This is a topic that many people are looking for. khurak.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, khurak.net would like to introduce to you Convertible Bonds Using Market Value Method, Accounting Complete Calculations & J/E s. Following along are instructions in the video below:
“This presentation. We re going to look at convertible bonds in how we convert those those bonds into common stock so originally we issued convertible bonds and our bond holders are holding these bonds and what we want to do is we want to exchange common stock for at least a portion of these bonds. And then the bond holders. We turn that portion back to us in exchange for that common stock.
So here is our example here we have a hundred thousand dollars worth of bonds payable that s a liability here on the balance sheet and that s based on par value of a thousand dollars per bond in a quantity of a hundred bonds outstanding. So when we originally issued these bonds we received a hundred and four thousand one hundred dollars for them so they were sold at a premium here and we needed a balancing account here between the cash of one hundred four thousand one hundred and the bond payable of a hundred thousand dollars. So we set up this valuation account here premium. Two bonds payable.
Now that s account that increases. The bonds payable. Account and then that valuation or that premium two bonds. Payable we recorded at 4100.
Here so that was the balancing entry between the credit tear of a hundred thousand dollars in the caption amount here of a hundred four thousand one hundred dollars and now we amortize that premium amounts payable down to this date that we want to convert them in here so we have to figure out what our carrying value is at the date that we convert these bonds so in this case. Here we had a premium amount here of twenty six hundred and forty seven dollars and then the net carrying of mount of that bond here was a hundred two thousand six hundred and seventy three dollars. So that s the figure. We re going to work with here when we convert those bonds in the common stock.
All right let s go through the mechanics of this bond conversion..
And we re going to be using the market value method. Here. Remember that the market value method. So number one here.
The bond holders converted. Forty thousand dollars. Worth of those convertible bonds or 40 of the convertible bonds that were outstanding here into the issuer s 5 park common stock and then looking at our. Numbers.
Down. Here the number of bonds converted would be the 40000. Worth here. Divided by a thousand dollars per bond or forty bonds.
And then the number of common stock or shares. That were issued here would be based on the forty bonds times. Ten dollars per share. Which were offering the bond holders for each one of those bonds.
And that would amount to a four hundred common shares our common stock of four hundred here so going up here and looking at our bonds payable and our premium two bonds payable..
Which are liabilities on the balance sheet. We d reduce those by that forty percent of the bonds that we converted here so the bonds payable would reduce by forty thousand dollars. Here and then our premium two bonds payable would also be reduced by that forty percent here. So we d end up with a thousand sixty nine dollars.
Here. So remember this premium two bonds payable that percent reduction here is based on the carrying value of in this case. A premium or a discount at the time of the conversion. So going up here and looking at the common stock that we issue.
Which is part of stockholders equity on the balance sheet. Here. We would credit here our common stock for the par value that would be the four hundred shares that we assured times. The five dollar par value per share or two thousand dollars here now our additional paid in capital.
We d increase that and that would be based on the number of shares. We issued the times. The issue price or the market price of those shares less this par value up here so in this case. We d have four hundred shares issued and our issue price was eighty dollars per share or the market price.
Let s just say is eighty dollars per share..
Less this 2 par. Value and then our total amount here at additional paid in capital will be thirty one thousand two hundred dollars here. So what we have to do is we have to recognize a gain or a loss on the difference here between this equity account here for our commons stock in this liability account here for our bonds payable. Whatever our carrying value is here so our carrying value and the converted.
Bonds here the total amount was. 40000. Plus 1069 or 41000. 69.
Here now in the market value of the stock that we recorded here the par value plus. The additional paid in capital was thirty three thousand two hundred dollars. So we recognize a gain or loss here on in our net income on the income statement in this case. It was again so we take the bonds carrying value less the market value of the stock here and in this case.
It was forty one thousand sixty million dollars less than thirty three thousand two hundred dollars and then we the difference here was seventy eight hundred and sixty nine dollars now we would credit this revenue account here or this gain on this for this exchange here for seventy eight hundred and sixty nine dollars. So that s a review here of how we d go through the mechanics and record. The journal entries here using the market value method. Now just remember here that we had to recognize a gain or a loss here on the difference between the carrying value of this bond here as a liability and the market value here of the common stock as part of stockholders equity review.
It we ve done here and this is using the market value method here so for our bonds payable and our premium the bonds payable here which is liabilities on the balance sheet..
We reduce those by the amount of those bonds we exchanged here using the carrying value of those bonds here now over here for our common stock. Which is part of stockholders equity on the balance sheet. We increase that by the market value of the stock that we issued here or the issue price of that a stock here so taking the par value plus. That issue price here we increased our equity here by thirty three thousand two hundred dollars and in the case here of these this bonds payable we decrease the liability here by forty one thousand sixty nine dollars.
So we have a difference here between this equity credit here of increase of thirty three thousand two hundred plus this debit or reduction here of our liability. So that remainder here we had to recognize either as a gain or a loss here and part of net income on the income statement. And in this case. The difference here was again here of seventy eight hundred and sixty nine dollars.
So what we ve done here is we decreased our liabilities by the carrying value of those bonds we converted. But we increased their equity only by the market value of the shares that we issued and then the difference here we had to recognize in this case. It was a gain here so that s how we would summarize here. How the effect here on the decreasing liability.
In increasing the equity here on that conversion of ” ..
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