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Chapter 16: 3Q (page 873)

Discuss the similarities and the differences between convertible debt and debt issued with stock warrants.

Short Answer

Expert verified

Convertible bonds convey the choice of change into common stock at a predetermined cost during a specific period. Stock purchase warrants are given with bonds or preferred stock as an incitement to the investor.

Step by step solution

01

The similarities and the differences between convertible debt and debt issued with stock warrants

Convertible debt and debt issued with stock warrants are comparative in that: (1) both permit the guarantor to give issued stock warrants at a lower revenue cost than would commonly be accessible for straight obligation; (2) both permit the holders to buy the backer's stock at not as much as market esteem assuming the stock likes adequately from now on; (3) both gives the holder the insurance of and Debt security in the event that the worth of the stock doesn't appreciate; and (4) both are perplexing protections which contain components of debt and value at the hour of issue.

02

Primary characteristics of convertible debt and debt issued with stock warrants

Since Stock purchase warrants grant the acquisition of the organization鈥檚 common stock at a stated price at any time. Convertible debt can be redeemed or converted after a predefined period.

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Most popular questions from this chapter

(Conversion of Bonds) Vargo Company has bonds payable outstanding in the amount of \(500,000, and the Premium on Bonds Payable account has a balance of \)7,500. Each \(1,000 bond is convertible into 20 shares of preferred stock of parvalue of \)50 per share. All bonds are converted into preferred stock.

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

Kalin Corporation had 2017 net income of \(1,000,000. During 2017, Kalin paid a dividend of \)2 per share on 100,000 shares of preferred stock. During 2017, Kalin had outstanding 250,000 shares of common stock.Compute Kalin鈥檚 2017 earnings per share.

On January 1, 2017, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share ofBarwood鈥檚 \(5 par value common stock at \)50 per share at any time during the next 5 years. The market price of the stock is \(65 per share on the date of grant. The fair value of the options at the grant date is \)150,000. The period of benefit is 2 years. Prepare Barwood鈥檚 journal entries for January 1, 2017, and December 31, 2017 and 2018.

Angela Corporation issues 2,000 convertible bonds at January 1, 2016. The bonds have a 3-year life, and are issued at par with a face value of \(1,000 per bond, giving total proceeds of \)2,000,000. Interest is payable annually at 6%. Each bond is convertible into 250 ordinary shares (par value of $1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 8%.

Instructions

(a) Compute the liability and equity component of the convertible bond on January 1, 2016.

(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2016.

(c) Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2019, its maturity date.
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