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Chapter 16: Q2E (page 875)

(Conversion of Bonds) Aubrey Inc. issued \(4,000,000 of 10%, 10-year convertible bonds on June 1, 2017, at 98 plus accrued interest. The bonds were dated April 1, 2017, with interest payable April 1 and October 1. Bond discount is amortized semi-annually on a straight-line basis.On April 1, 2018, \)1,500,000 of these bonds were converted into 30,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a) Prepare the entry to record the interest expense at October 1, 2017. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)

(b) Prepare the entry(ies) to record the conversion on April 1, 2018. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made

Short Answer

Expert verified

a. Interest payable and interest expense will be debited. Discount on bonds payable and cash will be credited.

b. Bonds Payable and Interest Expense will be debited. Discount on Bonds Payable and Cash will be credited.

Step by step solution

01

Journal entry and calculation of (a)

Date

Transactions

Debit

Credit

Interest Payable ($200,000 X 2/6)

$66,667

Interest Expense ($200,000 X 4/6) + $2,712

$136,045

Discount on Bonds Payable

$2,712

Cash ($4,000,000 X 10% 梅 2)

$200,000

Calculations:

Par value

$4,000,000

Issuance price

(3,920,000)

Total discount

$80,000

Months remaining

(10 years x 12 months- 2 months of Nov. and Dec. )

118

Discount per month ($80,000 梅 118)

$678

Discount amortized (4 X $678)

$2,712

02

Journal entry and calculation of (b)

Date

Transactions

Debit

Credit

Bonds Payable

$1,500,000

Interest Expense ($200,000 X 4/6) + $2,712

$27,458

Common stock (30,000 x $20)

$600,000

Cash (Bal. figure)

$872,542

Calculations:

Discount related to 3/8 of the bonds ($80,000 X 3/8)

$30,000

Less: Discount amortized [($30,000 梅 118) X 10]

$2,542

Unamortized bond discount

$27,458

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Most popular questions from this chapter

What are the arguments for giving separate accounting recognition to the conversion feature of debentures?

EXCEL (Stock-Option Plan) Berg Company adopted a stock-option plan on November 30, 2016, that provided that 70,000 shares of \(5 par value stock be designated as available for the granting of options to officers of the corporation at a price of \)9 a share. The market price was \(12 a share on November 30, 2017.

On January 2, 2017, options to purchase 28,000 shares were granted to president Tom Winter鈥�15,000 for services to be rendered in 2017 and 13,000 for services to be rendered in 2018. Also on that date, options to purchase 14,000 shares were granted to vice president Michelle Bennett鈥�7,000 for services to be rendered in 2017 and 7,000 for services to be rendered in 2018. The market price of the stock was \)14 a share on January 2, 2017. The options were exercisable for a period of one year following the year in which the services were rendered. The fair value of the options on the grant date was \(4 per option.

In 2018, neither the president nor the vice president exercised their options because the market price of the stock was below the exercise price. The market price of the stock was \)8 a share on December 31, 2018, when the options for 2017 services lapsed.

On December 31, 2019, both president Winter and vice president Bennett exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share.

Instructions

Prepare the necessary journal entries in 2016 when the stock-option plan was adopted, in 2017 when options were granted, in 2018 when options lapsed, and in 2019 when options were exercised.

(Stock-Based Compensation) Assume that Amazon.com has a stock-option plan for top management. Each

stock option represents the right to purchase a share of Amazon \(1 par value common stock in the future at a price equal to the

fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning

of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the stock-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted

stock were granted at the beginning of 2017.

(c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for

(a) and (b).

(d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to

avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid

recording compensation expense?

(1) Substantially all employees may participate.

(2) The discount from market is small (less than 5%).

(3) The plan offers no substantive option feature.

(4) There is no preferred stock outstanding

16-18 (L04) (EPS: Simple Capital Structure) Flagstad Inc. presented the following data.

Net income \(2,500,000

Preferred stock: 50,000 shares outstanding,

\)100 par, 8% cumulative, not convertible 5,000,000

Common stock: Shares outstanding 1/1 750,000

Issued for cash, 5/1 300,000

Acquired treasury stock for cash, 8/1 150,000

2-for-1 stock split, 10/1

Instructions

Compute earnings per share.

(EPS: Simple Capital Structure) A portion of the combined statement of income and retained earnings of Seminole Inc. for the current year follows.

Income from continuing operations \(15,000,000

Loss from discontinued operations, net of

applicable income tax (Note 1) 1,340,000

Net income 13,660,000

Retained earnings at the beginning of the year 83,250,000

96,910,000

Dividends declared:

On preferred stock鈥擻)6.00 per share \( 300,000

On common stock鈥擻)1.75 per share 14,875,000 15,175,000

Retained earnings at the end of the year \(81,735,000

Note 1. During the year, Seminole Inc. suffered a major loss from discontinued operations of \)1,340,000 after applicable income tax reduction of \(1,200,000.

At the end of the current year, Seminole Inc. has outstanding 8,500,000 shares of \)10 par common stock and 50,000 shares of 6% preferred. On April 1 of the current year, Seminole Inc. issued 1,000,000 shares of common stock for $32 per share to help finance the loss from discontinued operations.

Instructions

Compute the earnings per share on common stock for the current year as it should be reported to stockholders
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