ABC Company issued a $1,000 convertible bond on December 31, 2020. The bond is convertible into 10 shares of ABC Company common stock. The stated interest rate on the bond is 4%. On the date of issue, the market prices the bond to yield 5% [the market rate of interest is 5%]. Interest is paid semi-annually on June 30 and December 31. The bond matures 10 years after the date of issue. On the date of issue, each share of ABC Company stock has a market value of $70. Please complete 1-10.

1. If an investor purchases this bond, how much will the investor receive when the bond matures in 10 years assuming the bond is never converted into common stock? [Note the investor will receive the same amount ABC would pay at maturity].
2. How much cash will ABC pay the investor in 2021? [Note: this will be relevant when we cover the statement of cash flows]
3. Prepare the June 30, 2021 journal entry for ABC to record interest expense, cash paid, and discount amortized. ABC uses the effective interest method. Two decimal places – do the pennies.
4. Prepare the December 31, 2021 journal entry for ABC to record interest expense, cash paid, and discount amortized. Two decimal places – do the pennies.
5. Determine the liability associated with this bond as of December 31, 2021 [issue price + discount amortized over two periods]. Note: when discount is amortized, accrued but unpaid interest is essentially being added to the liability. Two decimal places – do the pennies.
6. If the market value of a share of stock remained at $70 a share during 2021, why would an investor not convert the bond into the 10 shares of stock? [Assume the carrying value of the bond liability for ABC equals the fair value of the investment for the bond investor]
7. Assume ABC has net income of $500 for 2021 and a tax rate of 20%. Further assume that ABC had 20 shares of common stock outstanding during 2021 and no preferred stock outstanding.
8. Compute basic earnings per share.
9. Compute diluted earnings per share.
10. Assume conversion of the bond on January 2, 2022. Prepare ABC’s journal entry to record the conversion using the book value method. [Ignore interest and discount amortization for January 1, 2022]. The fair value of each share of ABC stock is $130 on January 2, 2022. However, ABC uses the book value method to record a conversion. ABC’s common stock has a par value of $1 per share.