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Chapter 16: Q6BE. (page 874)

On January 1, 2017, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share ofBarwood’s \(5 par value common stock at \)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’s journal entries for January 1, 2017, and December 31, 2017 and 2018.

Short Answer

Expert verified

Compensation expenses for 2017 and 2018 will be debited with $75,000, and Paid-in Capital—StockOptions will be credited for 2017 and 2018 with $75,000.

Step by step solution

01

The following information is given

7% convertible bonds issued $4,000,000 par valuePaid-in Capital—Stock Options

With conversion feature 99

Without conversion feature 95

02

Journal Entry

Date

Description

DEBIT

CREDIT

1/1/17

No entry

12/31/17

Compensation Expense

$75,000

Paid-in Capital—Stock Options

$75,000

Being compensation expense incurred

12/31/18

Compensation Expense

$75,000

Paid-in Capital—Stock Options

$75,000

Being compensation expense incurred

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Most popular questions from this chapter

Rockland Corporation earned net income of \(300,000 in 2017 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was \)800,000 of 9% bonds, which are convertible into 16,000 shares of common. Rockland’s tax rate is 40%. Compute Rockland’s 2017 diluted earnings per share.

Cordero Corporation has an employee stock-purchase plan which permits all full-time employees to purchase 10 shares of common stock on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased and no commission is charged. Discuss whether this plan would be considered compensatory.

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

CA16-5 (EPS: Preferred Dividends, Options, and Convertible Debt) “Earnings per share” (EPS) is the most featured, single financial statistic about modern corporations. Daily published quotations of stock prices have recently been expanded to include for many securities a “times earnings” figure that is based on EPS. Stock analysts often focus their discussions on the EPS of the corporations they study.

Instructions

(a) Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.

(b) One of the technical procedures applicable in EPS computations is the “treasury-stock method.” Briefly describe the circumstances under which it might be appropriate to apply the treasury stock method.

(c) Convertible debentures are considered potentially dilutive common shares. Explain how convertible debentures are handled for purposes of EPS computations.

Pechstein Corporation issued 2,000 shares of \(10 par value common stock upon conversion of 1,000 shares of \)50 par value preferred stock. The preferred stock was originally issued at \(60 per share. The common stock is trading at \)26 per share at the time of conversion. Record the conversion of the preferred stock
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