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Chapter 16: 4Q (page 873)

Bridgewater Corp. offered holders of its 1,000 convertible bonds a premium of \(160 per bond to induce conversion into shares of its common stock. Upon conversion of all the bonds, Bridgewater Corp. recorded the \)160,000 premium as a reduction of paid-in capital. Comment on Bridgewater’s treatment of the $160,000 “sweetener.”

Short Answer

Expert verified

The FASB requires that the "sweetener" of $160,000 be accounted as an expense.

Step by step solution

01

Treatment of Sweetener as per the accounting norms

The issue of $160,000 "sweetener" as a premium induces the conversion of the bonds into common shares of B Corporation. The premium represents a departure from GAAP because the FASB views the transaction as the retirement of debt.

02

Discussing GAAP standards for paid-in- capital

Subsequently, the decrease in how much paid-in capital is an infringement of the GAAP standards. The top notch will diminish the conveying measure of the bonds, and the difference between the issue value of the common stock and the carrying value of the bonds shall be recognized immediately as an expense.

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Most popular questions from this chapter

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.

(L04) (EPS: Simple Capital Structure) Ace Company had 200,000 shares of common stock outstanding on December 31, 2018. During the year 2019, the company issued 8,000 shares on May 1 and retired 14,000 shares on October 31. For the year 2019, Ace Company reported net income of \(249,690 after a loss from discontinued operations of \)40,600 (net of tax).

Instructions

What earnings per share data should be reported at the bottom of its income statement?

Petrenko Corporation has outstanding 2,000 \(1,000 bonds, each convertible into 50 shares of \)10 par value common stock. The bonds are converted on December 31, 2017, when the unamortized discount is \(30,000 and the market price of the stock is \)21 per share. Record the conversion using the book value approach.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.

(Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2017. The stock has a fair value of \(500,000 on this date. The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with the company until December 31, 2021. The par value of the stock is \)10. At December31, 2017, the fair value of the stock is $450,000.

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 July 25, 2021, Tokar leaves the company. Prepare the journal entry (if any) to account for this forfeiture
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