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Chapter 16: Q8E (page 876)

(Issuance of Bonds with Detachable Warrants) On September 1, 2017, Sands Company sold at 104 (plus accrued interest) 4,000 of its 9%, 10-year, \(1,000 face value, nonconvertible bonds with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common stock at a specified option price of \)15 per share. Shortly after issuance, the warrants were quoted on the market for \(3 each. No fair value can be determined for the Sands Company bonds. Interest is payable on December 1 and June 1. Bond issue costs of \)30,000 were incurred.

Prepare in general journal format the entry to record the issuance of the bonds

Short Answer

Expert verified

Cash will be debited by $4,220,000, and Unamortized Bond Issue Costs will be credited by $30,000, Bonds Payable will be credited by $4,000,000, Premium on Bonds Payable will be credited by $136,000; Paid-in Capital—Stock Warrants will be credited by $24,000 and Interest Expense will be credited by $90,000.

Step by step solution

01

Journal entry

Date

Transactions

Debit

Credit

September 1, 2017

Cash ($4,160,000 + $90,000 − $30,000)

$4,220,000

Unamortized Bond Issue Costs

$30,000

Bonds Payable (4,000 X $1,000)

4,000,000

Premium on Bonds Payablle

136,000

Paid-in Capital—Stock Warrants

24,000

Interest Expense

90,000

(To record the issuance of the bonds)

02

Calculation of premium on bonds payable

Sales proceeds (4,000 X $1,040)

$4,160,000

Less: Face value of bonds

$4,000,000

Excess of funds over face value

$160,000

Deduct values of stock warrants

 (4,000 X 2 = 8,000; 8,000 X $3)

24,000

Premium on bonds payable

$136,000

03

Calculation of accrued interest

Face value of bonds $4,000,000

$4,000,000

Interest rate

9%

Annual interest ($400,000 x 9%)

$360,000

Accrued interest for 3 months – ($360,000 X 3/12)

$90,000

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Most popular questions from this chapter

(Conversion of Bonds) The December 31, 2017, balance sheet of Kepler Corp. is as follows.10% callable, convertible bonds payable (semiannual interest dates April 30 and October 31; convertible into 6 shares of \(25 par value common stock per \)1,000 of bond principal; maturity date April 30, 2023) \(500,000Discount on bonds payable 10,240 \)489,760On March 5, 2018, Kepler Corp. called all of the bonds as of April 30 for the principal plus interest through April 30. By April 30, all bondholders had exercised their conversion to common stock as of the interest payment date. Consequently, on April 30, Kepler Corp. paid the semiannual interest and issued shares of common stock for the bonds. The discount is amortized on a straight-line basis. Kepler uses book value method.

Prepare the entry(the ies) to record the interest expense and conversion on April 30, 2018. Reversing entries were made on January 1, 2018. (Round to the nearest dollar.)

(Weighted-Average Number of Shares) Newton Inc. uses a calendar year for financial reporting. The company is authorized to issue 9,000,000 shares of $10 par common stock. At no time has Newton issued any potentially dilutive securities. Listed below is a summary of Newton’s common stock activities.

1. Number of common shares issued and outstanding at December 31, 2015 2,000,000

2. Shares issued as a result of a 10% stock dividend on September 30, 2016 200,000

3. Shares issued for cash on March 31, 2017 2,000,000Number of common shares issued and outstanding at December 31, 2017 4,200,000

4. A 2-for-1 stock split of Newton’s common stock took place on March 31, 2018

Instructions

(a) Compute the weighted-average number of common shares used in computing earnings per common share for 2016 on the 2017 comparative income statement.

(b) Compute the weighted-average number of common shares used in computing earnings per common share for 2017 on the 2017 comparative income statement.

(c) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2017 on the 2018 comparative income statement.

(d) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2018 on the 2018 comparative income statement

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.

Ferraro, Inc. established a stock-appreciation rights (SARs) program on January 1, 2017, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of \(20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be \)4 on December 31,2017, and $9 on December 31, 2018. Compute Ferraro’s compensation expense for 2017 and 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?
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