Reference no: EM132888958

Problem - Convertible Bonds - Wedge Corporation issued $1,500,000 of 10% convertible bonds for $1,620,000 on March 1, 2019. The bonds are dated March 1, 2019, pay interest semiannually on August 31 and February 28, and the premium is amortized using the straight-line method. The bonds are due on February 28, 2029, and each $1,000 bond is convertible into 25 shares of Wedge's $10 par common stock. On March 1, 2021, when the shares were selling for $28 per share, $300,000 of bonds were converted. On September 1, 2023, when the shares were selling for $30 per share, the remainder of the bonds were converted.

Required -

1. Prepare the journal entries to record each bond conversion using (a) the book value method (b) the market value method.

2. If the company were required under GAAP to assign a value to the conversion feature, explain how the valuation would be determined (no calculations are required).

3. Compute the company's debt-to-equity ratio (total liabilities divided by total shareholders' equity, as mentioned in Chapter 6) under each alternative. Assume the company's other liabilities are $3 million, and that shareholders' equity before conversion is $3.5 million. Compute the ratio right before and right after the March 1, 2021, transaction under each alternative.

4. Assume the company uses IFRS and issued the bonds for $1,620,000 on March 1, 2019. On this date, it determined that the fair value of each bond was $1,040 and the fair value of the conversion option was $40 per bond. Prepare the journal entry to record the issuance of the bonds.