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Chapter 16: Q6E (page 876)

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

Short Answer

Expert verified

Answer

(a) Bond Interest Expense and Premium on Bonds Payable will be debited. Cash will be credited.

(b) Bonds Payable and Premium on Bonds Payable will be debited. Common Stock and Paid-in Capital in Excess of Par will be credited.

(c) Bond Interest Expense, Premium on Bonds Payable, Bond Interest Payable and Bonds Payable will be debited. Premium on Bonds Payable, Common Stock and Paid-in Capital in Excess of Par will be credited.

(d) Bond Interest Expense, Premium on Bonds Payable, and Bond Interest Payable will be debited. Cash will be credited.

Step by step solution

01

(a) Journal entry

Date

Description

DEBIT

CREDIT

December 31, 2018

Bond Interest Expense

$156,000

Premium on Bonds ($80,000 x 1/20)

$4,000

Cash ($4,000,000 X 8% X 6/12)

$160,000

Being interest expense recorded

02

(b) Journal Entry

Date

Description

DEBIT

CREDIT

January 1, 2019

Bonds Payable

$400,000

Premium on Bonds (64,000*10%)

$6,400

Common Stock [8 X $100 X ($400,000/$1,000)]

$320,000

Paid-in Capital in Excess of Par (80,000+6,400)

$86,400

Being bonds are converted into common stock

03

(c) Journal entry

Date

Description

DEBIT

CREDIT

March 31, 2019

Bond Interest Expense

$7,800

Premium on Bonds [(6400/8) x 3/12]

$200

Bond Interest Payable (400,000 x 8% x 3/12)

$8,000

Being interest expense are recorded

Bonds Payable

$400,000

Premium on Bonds Payable (6400-200)

$6,200

Common Stock

320,000

Paid-in Capital in Excess of Par

86,200

Being $400,000 of debentures are converted on March 31, 2019

04

(d) Journal entry

Date

Description

DEBIT

CREDIT

June 30, 2019

Bond Interest Expense

$124,800

Premium on Bonds Payable (80,000 x 80% x 1/20)

$3,200

Bond Interest Payable (400,000 x 8% x 1/4)

$8,000

Cash [(3,200,000 x 8% x 1/2) +8000]

$136,000

Being interest on bonds payable paid

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Most popular questions from this chapter

On January 1, 2017, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share ofBarwood鈥檚 \(5 par value common stock at \)50 per share at any time during the next 5 years. The market price of the stock is \(65 per share on the date of grant. The fair value of the options at the grant date is \)150,000. The period of benefit is 2 years. Prepare Barwood鈥檚 journal entries for January 1, 2017, and December 31, 2017 and 2018.

(EPS with Convertible Bonds, Various Situations) In 2016, Chirac Enterprises issued, at par, 60 \(1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of \)17,500 and expenses other than interest andtaxes of $8,400 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.

Instructions

a) Compute diluted earnings per share for 2017.

b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2017 (rather than in 2016), and none have been converted or redeemed. Compute diluted earnings per share for 2017.

c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017.

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

What date or event does the profession believe should be used in determining the value of a stock option? What arguments support this position?

EPS: Simple Capital Structure) On January 1, 2018, Wilke Corp. had 480,000 shares of common stock outstanding. During 2018, it had the following transactions that affected the common stock account.

February 1 Issued 120,000 shares

March 1 Issued a 10% stock dividend

May 1 Acquired 100,000 shares of treasury stock

June 1 Issued a 3-for-1 stock split

October 1 Reissued 60,000 shares of treasury stock

Instructions

(a) Determine the weighted-average number of shares outstanding as of December 31, 2018.

(b) Assume that Wilke Corp. earned net income of \(3,456,000 during 2018. In addition, it had 100,000 shares of 9%, \)100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare and pay a preferred dividend in 2018. Compute earnings per share for 2018, using the weighted-average number of shares determined in part (a).

(c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2018.

(d) Assume the same facts as in part (b), except that net income included a loss from discontinued operations of $432,000 (net of tax). Compute earnings per share for 2018.
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