 and welcome to this session. This is Professor Farhad in which we would look at CPA questions that deal with convertible securities. Those topics are covered on the FAR exam section as well as intermediate accounting. Farhadlectures.com is a CPA supplemental tool that's going to help you prepare for your CPA exam as well as your accounting courses. Farhad lectures is different than Becker, Roger, Glyme, Wiley and Sargent. You do need those courses to pass the exam. Farhadlectures.com will supplement, will explain, will go a little bit more in depth in a slower mode than other courses. In other courses they assume you know the material, they would review it with you. Farhadlectures.com is where you would really learn the material from scratch where it becomes very easier for you to review it in your CPA course. I do cover many other courses. If you like my lectures, please like them and share them. Connect with me on LinkedIn, subscribe to my YouTube. So on my website you will find those additional resources, CPA questions, lectures, practices to help you prepare for your CPA course as well as for the exam. Let's take a look at this first question. So the question reads, on December 31st, what amount should toss, record as a discount or premium on the issuance of bonds? So we're issuing a bond and we need to know how much we need to record as a discount or premium. On December 31st the company issued $1 million, 11% bond at 109. What does that mean at 109? Well first you need to know how to read the prices for bonds. Bonds are quoted as a percentage of the par value. This is the par value, a million and 109 is the price. So what we do is we take $1 million, the face value times 109% or 109 and that's going to give us, so we received in total $1 million and $90,000. Well the best way to do this is to start to journalize the entry. We debit cash $1 million and $90,000. Now don't do that on the exam but I'm going through this step by step. First I need to know what's the premium and the discount. I do need a journal entry. Each $1,000 bond was issued with 50 detachable stock warrant, each of which entitled the bond holder to purchase one share of $5 common stock for $25. So what happened is this. First we need to know how many bonds do we have. Well bonds comes in $1,000 denomination. So here's how it happens. We have a million dollar worth of bonds. If we divide this by a thousand, well let's take out the zeros, what we are doing is we issued 1,000 bonds. That's what we are issuing in terms of number of bonds. Each $1,000 bond was issued with 50 detachable stock warrant. So each bond will give you 50 detachable stock warrant and those stock warrant. So you will have 50 options, basically 50 warrant entitled the bond holder to purchase one share that has a power value of $5 for $25. So simply put if you have one bond, you have 50 warrant, you can buy the shares at $25 and have to pay cash that much. Okay just so you know what we are doing but that's how we're doing accounting for it. I just wanted to let you know what does that mean in case they could ask you questions about that portion of the question but that's not what they're asking in this situation. Immediately after issuance the market value for each warrant was $4. Okay so remember for each bond we have 50 warrant, we have 1,000 bonds. Well if you think about it, if we have 1,000 bonds each 1,000 bond, each bond will have 50 warrant, that's 50,000 warrant and each warrant is worth $4. So we have 200,000 worth of warrant. Well guess what, here's what happened in this situation. We know how much cash we received. We know that we received 1,090,000. Now we know, well before we do the warrant, now let's do the warrant first. We know that the warrant is worth 200,000. How did we know this? The information is giving to us. They tell us the fair market value is $4 for each warrant. Therefore what we do is we credit an equity account called warrants. Now they might call it something else but something to do with warrants, 200,000. And I forgot I should have did this earlier. As soon as you debited cash 1,090,000 we should have did is credit bonds payable. I should have did that immediately of a million. Okay because bonds payable has a face value of a million. The par value is of a million so you're always going to pay the bonds payable at a million. Okay we still haven't answered the question. We're almost there but we haven't answered the question yet. So we accounted for the cash. We accounted for the bond. We accounted for the warrant. What's left is either a premium or a discount. What we're looking for we're missing a debit. A debit means we have a discount. So immediately you will take out B. You will take out A. You're down to 50-50. Well what's missing? What's missing is 110,000. It's a discount. So simply put this bond is issued at a discount. Hold on a second. It can be issued at a discount because we received 1,090,000. Yes we did receive 1,090,000 but remember this bond part of the 1,090,000 is 200,000 of warrants. So what's left is 890,000. So for the bond itself for the bond itself we received 890,000 although we have a face value of a million. We have to pay back a million and the reason is because we issued it at a discount and that's the question. How much discount or premium? It's issued at a discount and the discount is 110,000. Therefore the answer is C. So on this question they could ask you how much did equity increase? Well equity increased by 200,000 because warrants are part of your stockholders' equity. They could ask you about this. They could ask you what should have been bond spable. Always bond spable, debited and credited for the face amount or the power value. So they could have asked you many questions here but that's what happened to ask us is what is the amount of the discount or the premium? So you want to make sure you are comfortable with going through these transactions. Again I'm going to say if you go to farhatlectures.com I cover bonds in detail. So to be comfortable with this convertible bonds you have to be comfortable with regular bonds. So before you get to this point if you're not comfortable with regular bonds this will be more challenging. Let's take a look at this question. We have Vogel company has 4,088% convertible bond outstanding. It means we have in other words 4,000 bonds and they pay 8% and those bonds are convertible. Well let's read the question first. Vogel should record as a result of this conversion what they should record. So it could be a lot of things, a loss, a credit, a credit, a credit. So we just have to look at the question. Each 1,000 bond is convertible into 30 shares of $30 power value common stock. That's fine. The bond pay interest on January 31st and July 30th. They could ask a lot of questions about this. On July 31st 2018 the holders of 1,280,000 bond exercised the conversion privilege. On that date the market price of the bond was 105 and the market price of the common stock was 36. So here I'm going to make this easier for you. There was a conversion from bonds to stocks. That's what's happening here. We converted some of the bonds to stocks. Here they're giving you information that's useless for us. When you convert the market price is irrelevant. You don't use the market you don't use any market information. You're going to convert based on the book value. Therefore you could just kind of eliminate this. It's given to you to confuse you because you're going to be using the book value and under the book value you have no gain and no loss. Therefore we could also eliminate the simply put when you have bonds and you convert your bonds to stocks it's nothing really happened. It's a transaction between the debt and the equity section of the company. Therefore you cannot record again or a loss. Therefore you could eliminate the immediately. The total and amortized premium at the date of the conversion was 280. That's very relevant to us. So what happened is this we have 4 million bonds 4 million dollars worth of bonds which is 4,000 bonds. Of these bonds we retired 1,280 or 1,280. The first thing is we have to know is what percentage of our bond we we we retired. Why? Because when we retired a bond we have to debit bonds payable and I know I have to debit bonds payable for 1,280. That's part of the entry because if I retired if I'm I retired sorry if I converted the bond I have to retire them. I have to remove them. Therefore I have to debit bonds payable. When I have to debit bonds payable I also have to debit the amount of the premium because remember when you debit the bond you have to debit any premium that comes with the bond. Now the total premium is 280,000. If I am removing all the bonds I will debit premium I will debit premium 280 but I'm not removing all the bonds. I'm not removing all the bonds. I'm only removing 1,280,000 out of 4 million bonds worth of bonds. So I am I am retiring 32 percent therefore I have to retire 280,000 times 0.32 of the premium and that amount to 89,600. Therefore I will debit 89,600. What I just did I removed the bonds. I did part of the entry because remember I am converting the bond I will debit the bonds payable debit the premium because I need to remove those. So I remove the bond. Now I need to start to put the stocks on the books because I'm issuing stocks. I'm removing my bonds issuing stocks. When you issue stocks you have to credit common stock and how much do you credit common stock? Well if you listen to my lectures I keep telling you make sure you tattoo this on your hand. It's the number of shares you are issuing times the par value. How many new shares are you issuing times the par value? Well let's let's see how many shares are we issuing. Each bond will convert into 30 shares. Well if I have 1,280,000 of bonds I'm retiring divided by 1,000. So I'm retiring 1,280 bonds. This is the number of bonds. Each bond is issued into 30 shares. Let's see how many shares are we issuing. So 1,280 times 30 equal to 38,400 38,400. Now this is the number of shares. This is the number of shares and the par value happens to be also 30 dollars. So it's like they're making it confusing to us. This times the par value and that's going to be common stock. So let's do that. So I'm going to take 38,400 times the par value and that's going to give me 1,152,000. Therefore my common stock is 1,152,000. So now actually as I'm doing this once I got to this point I could take out C because C it says credit 89,600 to premium. I need to debit the premium. Therefore I take out C. So at least I'm down to 50-50. Now all what I have to do is anything that's left, anything that's left. So basically anything that's left when you're issuing stocks is you credit paid in capital. And how much left? Well the number that we're missing is 200. Basically this is a plug. 217,600 and the answer is A. 217,600. So this is how you will complete this question. Get rid of the bond, get rid of the premium. Okay the premium remember is an adjunct liability. Therefore you debit the premium you get rid of the bond. Then you start with issuing stocks because you know the formula for issuing stocks. How do I know the formula? The number of shares times the par value. How many shares am I issuing? I am converting 1,280 bonds each into 30 shares. I'm going to be issuing 38,400 shares times a par value of 30. I'm going to be crediting common stock. This much in what's left is paid in capital. For head lecturers.com this is where I have detailed explanation. For example this topic is covered in my intermediate accounting as well as CPA FAR section. Wherever course you are taking Wiley, Becker, Roger it doesn't matter which course. If you are studying for your CPA exam I strongly suggest you invest in farhatlectures.com. Your CPA exam is a lifetime career. It's going to pay you dividend for decades. Take it seriously, study hard, good luck and stay safe.