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Chapter 16: Q9E (page 877)

Question: (Issuance of Bonds with Stock Warrants) On May 1, 2017, Friendly Company issued 2,000 \(1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined.

Instructions

(a) Prepare the entry to record the issuance of the bonds and warrants.

(b) Assume the same facts as part (a), except that the warrants had a fair value of \)30. Prepare the entry to record the issuance of the bonds and warrants.

Short Answer

Expert verified

Answer

  1. Cash is debited by $2,040,000; Discount on bonds payable is debited by $40,000 and Bonds payable is credited by $2,000,000; Paid-in capital- stock warrant is $80,000.
  2. Cash is debited by $2,040,000; Discount on bonds payable is debited by $20,594 and Bonds payable is credited by $2,000,000; Paid-in capital- stock warrant is $60,594.

Step by step solution

01

(a) Journal entry to record issuance

Date

Accounts and Explanations

Debit

Credit

Cash [(2,000*$1,000) *102%]

2,040,000

Discount on bonds payable (2,000,000*2%)

40,000

Bonds payable (2,000*$1,000)

2,000,000

Paid-in capital- stock warrant ($2,040,000- $1,960,000)

80,000

(Being recording insurance of the bond and warrant)

02

(b) Journal entry to record issuance with fair value of warrants

Date

Accounts and Explanations

Debit

Credit

Cash [(2,000*$1,000) *102%]

2,040,000

Discount on bonds payable (2,000,000- $1,979,406)

20,594

Bonds payable

2,000,000

Paid-in capital- stock warrant [($60,000/$2,020,000) *$2,040,000]

60,594

(Being recording insurance of the bond and warrant)

03

Fair market value of bonds and stock warrant-

Fairvalueofbonds=Issuedshares×Sellingprice=$2,000,000×98%=$1,960,000Fairvalueofbonds=Issuednoofshares×Fairvalue=2,000×$30=$60,000

04

Allocation of cash received to bonds and warrants-


Allocatedtobonds=Cash×FairvalueofbondsFairvalueofbonds+Fairvalueofstockwarrant=$2,040,000×$1,960,000$1,960,000+$60,000=$1,979,406Allocatedtowarrent=Cash×FairvalueofbondsFairvalueofbonds+Fairvalueofstockwarrant=$2,040,000×$60,000$1,960,000+$60,000=$60,594

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Most popular questions from this chapter

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

(Conversion of Bonds) Aubrey Inc. issued \(4,000,000 of 10%, 10-year convertible bonds on June 1, 2017, at 98 plus accrued interest. The bonds were dated April 1, 2017, with interest payable April 1 and October 1. Bond discount is amortized semi-annually on a straight-line basis.On April 1, 2018, \)1,500,000 of these bonds were converted into 30,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a) Prepare the entry to record the interest expense at October 1, 2017. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)

(b) Prepare the entry(ies) to record the conversion on April 1, 2018. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made

(EPS with Complex Capital Structure) Amy Dyken, controller at Fitzgerald Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Fitzgerald’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2017.

FITZGERALD PHARMACEUTICAL INDUSTRIES

SELECTED BALANCE SHEET

INFORMATION

JUNE 30, 2017

Long-term debt

Notes payable, 10% \( 1,000,000

8% convertible bonds payable 5,000,000

10% bonds payable 6,000,000

Total long-term debt \)12,000,000

Shareholders’ equity

Preferred stock, 6% cumulative, \(50 par value,

100,000 shares authorized, 25,000 shares issued

and outstanding \) 1,250,000

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

1,000,000 shares issued and outstanding 1,000,000

Additional paid-in capital 4,000,000

Retained earnings 6,000,000

Total shareholders’ equity \)12,250,000

The following transactions have also occurred at Fitzgerald.

1. Options were granted on July 1, 2016, to purchase 200,000 shares at \(15 per share. Although no options were exercised

during fiscal year 2017, the average price per common share during fiscal year 2017 was \)20 per share.

2. Each bond was issued at face value. The 8% convertible bonds will convert into common stock at 50 shares per \(1,000

bond. The bonds are exercisable after 5 years and were issued in fiscal year 2016.

3. The preferred stock was issued in 2016.

4. There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2017.

5. The 1,000,000 shares of common stock were outstanding for the entire 2017 fiscal year.

6. Net income for fiscal year 2017 was \)1,500,000, and the average income tax rate is 40%.

Instructions

For the fiscal year ended June 30, 2017, calculate the following for Fitzgerald Pharmaceutical Industries.

(a) Basic earnings per share.

(b) Diluted earnings per share.

(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.

Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2018. (c) March 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method
See all solutions

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