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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 – $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—Stock 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

GROUPWORK (Entries for Various Dilutive Securities) The stockholders’ equity section of Martino Inc. at the beginning of the current year appears below.

Common stock, \(10 par value, authorized 1,000,000

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of par—common stock 600,000

Retained earnings 570,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at \(32. The rights were void after 30 days. The market price of the stock at this time was \)34 per share.

2. The company sold to the public a \(200,000, 10% bond issue at 104. The company also issued with each \)100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at \(30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at \)8.

3. All but 5,000 of the rights issued in (1) were exercised in 30 days.

4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing.

5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives.

The company, using a fair value option-pricing model, determines that each option is worth \(10. The option price is \)30.

The options were to expire at year-end and were considered compensation for the current year.

6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

(a) Prepare general journal entries for the current year to record the transactions listed above.

(b) Prepare the stockholders’ equity section of the balance sheet at the end of the current year. Assume that retained earnings

at the end of the current year is $750,000.

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

Four years after issue, debentures with a face value of \(1,000,000 and book value of \)960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at \(14 per share (par value \)10). The company records the conversion as follows. Bonds Payable 1,000,000 Discount on Bonds Payable 40,000 Common Stock 800,000 Paid-in Capital in Excess of Par— Common Stock 160,000 Discuss the propriety of this accounting treatment.

Define the following terms. (a) Basic earnings per share. (b) Potentially dilutive security. (c) Diluted earnings per share. (d) Complex capital structure. (e) Potential common stock.

Where can authoritative IFRS be found related to dilutive securities, stock-based compensation, and earnings per share?
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