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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

EPS with Contingent Issuance Agreement) Winsor Inc. recently purchased Holiday Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Holiday鈥檚 income for 2017 was \(110,000 or more, 10,000 additional shares would be issued to Holiday鈥檚 stockholders in 2018. Holiday鈥檚 income for 2016 was \)120,000.

Instructions

(a) Would the contingent shares have to be considered in Winsor鈥檚 2016 earnings per share computations?

(b) Assume the same facts, except that the 10,000 shares are contingent on Holiday鈥檚 achieving a net income of $130,000 in 2017. Would the contingent shares have to be considered in Winsor鈥檚 earnings per share computations for 2016?

GROUPWORK (Computation of Basic and Diluted EPS) Charles Austin of the controller鈥檚 office of Thompson

Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending

December 31, 2018. Austin has compiled the information listed below.

1. The company is authorized to issue 8,000,000 shares of \(10 par value common stock. As of December 31, 2017, 2,000,000

shares had been issued and were outstanding.

2. The per share market prices of the common stock on selected dates were as follows.

Price per Share

July 1, 2017 \)20.00

January 1, 2018 21.00

April 1, 2018 25.00

July 1, 2018 11.00

August 1, 2018 10.50

November 1, 2018 9.00

December 31, 2018 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2017.

The stock was issued at its par value of \(25, and it has a cumulative dividend of \)3 per share. The stock is convertible into

common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be

automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31,

March 31, and June 30.

4. Thompson Corporation is subject to a 40% income tax rate.

5. The after-tax net income for the year ended December 31, 2018, was \(11,550,000.

The following specific activities took place during 2018.

1. January 1鈥擜 5% common stock dividend was issued. The dividend had been declared on December 1, 2017, to all stockholders

of record on December 29, 2017.

2. April 1鈥擜 total of 400,000 shares of the \)3 convertible preferred stock was converted into common stock. The company

issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2018.

3. July 1鈥擜 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split

on June 1.

4. August 1鈥擜 total of 300,000 shares of common stock were issued to acquire a factory building.

5. November 1鈥擜 total of 24,000 shares of common stock were purchased on the open market at \(9 per share. These shares

were to be held as treasury stock and were still in the treasury as of December 31, 2018.

6. Common stock cash dividends鈥擟ash dividends to common stockholders were declared and paid as follows.

April 15鈥擻)0.30 per share

October 15鈥�$0.20 per share

7. Preferred stock cash dividends鈥擟ash dividends to preferred stockholders were declared and paid as scheduled.

Instructions

(a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2018.

(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2018.

(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year

ended December 31, 2018.

(EPS with Convertible Bonds and Preferred Stock) On January 1, 2017, Crocker Company issued 10-year, \(2,000,000 face value, 6% bonds, at par. Each \)1,000 bond is convertible into 15 shares of Crocker common stock. Crocker鈥檚 net income in 2017 was \(300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

Instructions

(a) Compute diluted earnings per share for 2017.

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that \)1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.

Tomba Corporation had 300,000 shares of common stock outstanding on January 1, 2017. On May 1, Tomba issued 30,000 shares. (a) Compute the weighted-average number of shares outstanding if the 30,000 shares were issued for cash. (b) Compute the weighted-average number of shares outstanding if the 30,000 shares were issued in a stock dividend.

(Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction.

1. Grand Corp. issued \(20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company鈥檚 investment banker estimates they would have been sold at 95.

2. Hoosier Company issued \)20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each \(100 par value bond. At the time of issuance, the warrants were selling for \)4.

3. Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the transaction. The 11%, \(10,000,000 par value bonds were converted into 1,000,000 shares of \)1 par value common stock on July 1, 2017. On July 1, there was \(55,000 of unamortized discount applicable to the bonds, and the company paid an additional \)75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.
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