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Chapter 16: Q4BE. (page 874)

Eisler Corporation issued 2,000 \(1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market price of \)40. Use the proportional method to record the issuance of the bonds and warrants.

Short Answer

Expert verified

Cash and discount on bonds payable are to be debited with $2,020,000 and $59,216, respectively. Bonds payable and paid-in Capital- Stock warrants will be credited with $2,000,000 and $79,216, respectively.

Step by step solution

01

The information given in the question are as follows:

Bonds Payable$2,000,000

Discount on Bonds Payable $59,216 ($2,000,000 鈥� $1,940,784)

Fair value of bonds$1,960,000(2,000 X $1,000 X 98)

Fair value of warrants$80,000(2,000 X $40)

Allocated to bonds$1,940,784[($1,960/$2,040) X $2,020,000]

Allocated to warrants$79,216 [($80/$2,040) X $2,020,000]

02

Recording the issuance of the bonds and warrants

Date

Transaction

Debit

Credit

Cash

$2,020,000

Discount on Bonds Payable

$59,216

Bonds Payable

$2,000,000

Paid-in Capital鈥擲tock Warrants

$79,216

Being bonds are issued at discount

Fair value of bonds

$1,960,000

Fair value of warrants

$80,000

Aggregate fair value

$2,040,000

Allocated to bonds

$1,940,784

Allocated to warrants

$79,216

$2,020,000

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Most popular questions from this chapter

(Conversion of Bonds) On January 1, 2016, when its \(30 par value common stock was selling for \)80 per share, Plato Corp. issued \(10,000,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each \)1,000 bond to convert the bond into five shares of the corporation鈥檚 common stock. The debentures were issued for \(10,800,000.The present value of the bond payments at the time of issuance was \)8,500,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, the corporation鈥檚 \(30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2018, when the corporation鈥檚 \)15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercisedtheir conversion options. The corporation uses the straight-line method for amortizing anybond discounts or premiums.

a) Prepare in general journal form the entry to record the original issuance of the convertible debentures.

(b) Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method.

Show supporting computations in good form.

Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance of the bonds.

Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2018. (c) March 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method

Accounting for Restricted Stock) Derrick Company issues 4,000 shares of restricted stock to its CFO, Dane Yaping, on January 1, 2017. The stock has a fair value of \(120,000 on this date. The service period related to this restricted stock is 4 years. Vesting occurs if Yaping stays with the company for 4 years. The par value of the stock is \)5. At December 31, 2018, the fair value of the stock is $145,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On March 4, 2019, Yaping leaves the company. Prepare the journal entry (if any) to account for this forfeiture.

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.
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