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Chapter 16: 7E (page 876)

(Issuance of Bonds with Warrants) Illiad Inc. has decided to raise additional capital by issuing \(170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each \)100 bond sold. The value of the bonds without the warrants is considered to be \(136,000, and the value of the warrants in the market is \)24,000. The bonds sold in the market at issuance for $152,000.

Instructions

(a) What entry should be made at the time of the issuance of the bonds and warrants?

(b) If the warrants were nondetachable, would the entries be different? Discuss.

Short Answer

Expert verified
  1. Cash debited by $152,000, discount on bonds payable debited by $40,800, bond payable credited by $170,000 and paid-in capital stock warrants credited by $22,800.
  2. Cash debited by $152,000, discount on bond payable debited by $18,000 and bond payable credited by $170,000.

The paid-in capital of the stock warrants is $22,800.

Step by step solution

01

Entry for the issue on the bonds

Date

Particulars

Debit

Credit

Cash

$152,000

Discount on Bonds Payable

$40,800

Bonds Payable

$170,000

Paid-in Capital Stock Warrants

$22,800

(Being entry is made for the issuance of the bonds and warrants)

Paid-in capital of stock warrants:

Paid-inCapital=SalesValuesofbonds(Valueofbonds+ValueofWarrants)脳valueofwarrants=$152,000$136,000+$24,000脳$24,000=$22,800

02

Entry if bonds are nondetachable

Date

Particulars

Debit

Credit

Cash

$152,000

Discount on Bonds Payable

$18,000

Bonds Payable

$170,000

(being entry if warrants are nondetachable)

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Most popular questions from this chapter

At December 31, 2017, Reid Company had 600,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 200,000 of which were issued on October 1, 2017. Net income for 2017 was \(2,000,000, and dividends declared on preferred stock were \)400,000. Compute Reid鈥檚 earnings per common share. (Round to the nearest penny.)

Accounting, Analysis, and Principles

On January 1, 2016, Garner issued 10-year, \(200,000 face value, 6% bonds at par. Each \)1,000 bond is convertible into 30 shares of Garner \(2 par value common stock. The company has had 10,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2017. (Ignore all tax effects.)

Accounting

(a) Prepare the journal entry Garner would have made on January 1, 2016, to record the issuance of the bonds.

(b) Garner鈥檚 net income in 2017 was \)30,000 and was \(27,000 in 2016. Compute basic and diluted earnings per share for Garner for 2017 and 2016.

(c) Assume that 75% of the holders of Garner鈥檚 convertible bonds convert their bonds to stock on June 30, 2018, when Garner鈥檚 stock is trading at \)32 per share. Garner pays $50 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.

Analysis

Show how Garner will report income and EPS for 2017 and 2016. Briefly discuss the importance of GAAP for EPS to analysts evaluating companies based on price-earnings ratios. Consider comparisons for a company over time, as well as comparisons between companies at a point in time.

Principles

In order to converge GAAP and IFRS, the FASB is considering whether the equity element of a convertible bond should be reported as equity. Describe how the journal entry you made in part (a) above would differ under IFRS. In terms of the accounting principles discussed in Chapter 2, what does IFRS for convertible debt accomplish that GAAP potentially sacrifices? What does GAAP for convertible debt accomplish that IFRS potentially sacrifices?

E16-29 (L06) (Stock-Appreciation Rights) On December 31, 2013, Beckford Company issues 150,000 stock-appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of \(10. The fair value of the SARs is estimated to be \)4 per SAR on December 31, 2014; \(1 on December 31, 2015; \)10 on December 31, 2016; and $9 on December 31, 2017. The service period is 4 years, and the exercise period is 7 years.

Instructions

(a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stockappreciation rights plan.

(b) Prepare the entry at December 31, 2017, to record compensation expense, if any, in 2017.

(c) Prepare the entry on December 31, 2017, assuming that all 150,000 SARs are exercised.

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

Four years after issue, debentures with a face value of \(1,000,000 and book value of \)960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at \(14 per share (par value \)10). The company records the conversion as follows. Bonds Payable 1,000,000 Discount on Bonds Payable 40,000 Common Stock 800,000 Paid-in Capital in Excess of Par鈥� Common Stock 160,000 Discuss the propriety of this accounting treatment.
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