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Chapter 16: Q3E (page 875)

(Conversion of Bonds) Vargo Company has bonds payable outstanding in the amount of \(500,000, and the Premium on Bonds Payable account has a balance of \)7,500. Each \(1,000 bond is convertible into 20 shares of preferred stock of parvalue of \)50 per share. All bonds are converted into preferred stock.

Short Answer

Expert verified

Bonds Payable and Premium on Bonds Payable will be debited by $500.000 and $7,500 respectively, and preferred Stock and Paid-in Capital in Excess of Par (Preferred Stock) will be credited by $500.000 and $7,500 respectively.

Step by step solution

01

Explanation on bonds payable

Bonds payable are long term debt instruments issued by the entities to procure funds by way of debt.

02

Conversion recorded at book value of the bonds:

Date

Accounts & Explanation

Debit

Credit

Bonds Payable

500,000

Premium on Bonds Payable

7,500

Preferred Stock (500 X 20 X $50)

500,000

Paid-in Capital in Excess of Par- Preferred Stock)

7,500

Being bonds are converted

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Most popular questions from this chapter

How is compensation expense computed using the fair 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.

(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

Douglas Corporation had 120,000 shares of stock outstanding on January 1, 2017. On May 1, 2017, Douglas issued 60,000 shares. On July 1, Douglas purchased 10,000 treasury shares, which were reissued on October 1. Compute Douglas’s weighted-average number of shares outstanding for 2017.

What are the advantages of using restricted stock to compensate employees?
See all solutions

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