14-1 WELCOME TO MY CLASS 14-2 Convertible Bonds Some bonds may be converted into common stock at the options of the holder When bonds are converted the issuer updates interest expense and amortization of discount or premium to the date of conversion The bonds are reduced and shares of common stock are increased Bonds into Stock 14-3 Convertible Bonds The Book Value Method Record new stock at the book value of the convertible bonds No gain or loss is recognized On December 31, 2006, all of the bondholders of Matrix, Inc convert their bonds into common stock There are 10,000 bonds outstanding with a face value of $1,000 each Each bond is convertible into 50 shares of the company’s $1 par value common stock There is $1,500,000 on unamortized discount associated with the bonds that are converted Interest and discount amortization have been brought up to December 31 Let’s look at the entry to record the conversion 14-4 Convertible Bonds 10,000 × 50 shares × $1 par value The carrying value of the bonds is assigned to the stock 14-5 Bonds with Detachable Warrants Stock warrants give the investor an option to purchase a stated number of shares at a specified price within a specified period of time The issue price is allocated between the bonds and the warrants using market values 14-6 Bonds with Detachable Warrants Ex: Illustration 14-19, p.823 14-7 Bonds with Detachable Warrants If one-half of the warrants (1 million) are exercised when the market value of HTL’s common stock (1$ par) is $30 per share, how we record? - Cash (1,000,000 warrants × $25) 25 Equity—stock warrants (1,000,000 warrants × $3) Common stock (to balance) PIC, exceed par ……………… ………………27 ... conversion The bonds are reduced and shares of common stock are increased Bonds into Stock 14-3 Convertible Bonds The Book Value Method Record new stock at the book value of the convertible bonds No... December 31, 2006, all of the bondholders of Matrix, Inc convert their bonds into common stock There are 10,000 bonds outstanding with a face value of $1,000 each Each bond is convertible into 50...14-2 Convertible Bonds Some bonds may be converted into common stock at the options of the holder When bonds are converted the issuer updates interest expense and amortization of discount