Vargo Limited had $2.4 million of bonds payable outstanding and the unamortized premium for these bonds amounted to $44,500. Each $1,000 bond was convertible into 20 preferred shares. All bonds were then converted into preferred shares. The Contributed Surplus—Conversion Rights account had a balance of $22,200. Assume that the company follows IFRS.
Instructions
(a) Assuming that the book value method was used, what entry would be made?
(b) From the perspective of the bondholders, what is the likely motive for the conversion of bonds into preferred shares?
What are the advantages of each investment that are given up or obtained by the bondholders who chose to convert their investment?