On January 1, 2011, when its common shares were selling for $80 per share, Plato Corp. issued $10 million 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 common shares. The debentures were issued for $10.8 million. The bond payment’s present value at the time of issuance was $8.5 million and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2012, the corporation’s common shares were split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2013, when the corporation’s common shares were selling for $135 per share, holders of 30% of the convertible debentures exercised their conversion option. The corporation applies ASPE, and uses the straight-line method for amortizing any bond discounts or premiums.
Instructions
(a) Prepare in general journal form the entry to record the original issuance of the convertible debentures.
(b) Using the book value method, prepare in general journal form the entry to record the exercise of the conversion option. Show supporting calculations in good form.
(c) How many shares were issued as a result of the conversion?
(d) From the perspective of Plato Corp., what are the advantages and disadvantages of the conversion of the bonds into common shares?