E16-1(Issuance and Conversion of Bonds) For each of the ...



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E16-1(Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction. 1. Grand Corp. issued $20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company's investment banker estimates they would have been sold at 95. Expenses of issuing the bonds were $70,000. 2. Hoosier Company issued $20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $4. 3. Sepracor, Inc. called its convertible debt in 2007. Assume the following related to the transaction: The 11%, $10,000,000 par value bonds were converted into 1,000,000 shares of $1 par value common stock on July 1, 2007. On July 1, there was $55,000 of unamortized discount applicable to the bonds, and the company paid an additional $75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

1. Cash ($20,000,000 X .99) 19,800,000

Discount on Bonds Payable 200,000

Bonds Payable 20,000,000

Unamortized Bond Issue Costs 70,000

Cash 70,000

2. Cash 19,600,000

Discount on Bonds Payable 1,200,000

Bonds Payable 20,000,000

Paid-in Capital—Stock Warrants 800,000

Value of bonds

plus warrants

($20,000,000 X .98) $19,600,000

Value of warrants

(200,000 X $4) 800,000

Value of bonds $18,800,000

3. Debt Conversion Expense 75,000

Bonds Payable 10,000,000

Discount on Bonds Payable 55,000

Common Stock 1,000,000

Paid-in Capital in Excess of Par 8,945,000*

Cash 75,000

*[($10,000,000 – $55,000) – $1,000,000]

E16-11(Issuance, Exercise, and Termination of Stock Options) On January 1, 2008, 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, 2010, by grantees still in the employ of the company, and expiring December 31, 2014. 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, 2009, 2,000 options were terminated when the employees resigned from the company. The market value of the common stock was $35 per share on this date. On March 31, 2010, 12,000 options were exercised when the market value of the common stock was $40 per share. Hint: (LO 4) 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, 2008, 2009, and 2010.

1/1/08 No entry

12/31/08 Compensation Expense 175,000

Paid-in Capital—Stock Options 175,000

($350,000 X 1/2) (To recognize

compensation expense for 2008)

4/1/09 Paid-in Capital—Stock Options 17,500

Compensation Expense  17,500

($175,000 X 2,000/20,000)

(To record termination of stock

options held by resigned employees)

12/31/09 Compensation Expense 157,500

Paid-in Capital—Stock Options 157,500

($350,000 X 1/2 X 18/20) (To recognize

compensation expense for 2009)

3/31/10 Cash (12,000 X $25) 300,000

Paid-in Capital—Stock Options 210,000

($350,000 X 12,000/20,000)

Common Stock 120,000

Paid-in Capital in Excess of Par 390,000

(To record exercise of stock options)

Note: There are 6,000 options unexercised as of 3/31/10 (20,000 – 2,000 – 12,000).

E16-14(EPS: Simple Capital Structure) On January 1, 2008, Wilke Corp. had 480,000 shares of common stock outstanding. During 2008, it had the following transactions that affected the common stock account. February 1 Issued 120,000 shares March 1 Issued a 10% stock dividend May 1 Acquired 100,000 shares of treasury stock June 1 Issued a 3-for-1 stock split October 1 Reissued 60,000 shares of treasury stock Hint: (LO 6) Instructions a. Determine the weighted-average number of shares outstanding as of December 31, 2008. b. Assume that Wilke Corp. earned net income of $3,456,000 during 2008. In addition, it had 100,000 shares of 9%, $100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare and pay a preferred dividend in 2008. Compute earnings per share for 2008, using the weighted-average number of shares determined in part (a). c. Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2008. d. Assume the same facts as in part (b), except that net income included an extraordinary gain of $864,000 and a loss from discontinued operations of $432,000. Both items are net of applicable income taxes. Compute earnings per share for 2008.

(a)

| |Dates |Shares | |Fraction |Weighted |

|Event |Outstanding |Outstanding |Restatement |of Year |Shares |

|Beginning balance |Jan. 1–Feb. 1 |480,000 |1.1 X 3.0 |1/12 |132,000 |

|Issued shares |Feb. 1–Mar. 1 |600,000 |1.1 X 3.0 |1/12 |165,000 |

|Stock dividend |Mar. 1–May 1 |660,000 |3.0 |2/12 |330,000 |

|Reacquired shares |May 1–June 1 |560,000 |3.0 |1/12 |140,000 |

|Stock split |June 1–Oct. 1 |1,680,000 | |4/12 |560,000 |

|Reissued shares |Oct. 1–Dec. 31 |1,740,000 | |3/12 | 435,000 |

| Weighted average number of shares outstanding | |1,762,000 |

|(b) |Earnings Per Share = |$3,456,000 (Net Income) |= $1.96 |

| | |1,762,000 (Weighted Average Shares) | |

|(c) |Earnings Per Share = |$3,456,000 – $900,000 |= $1.45 |

| | |1,762,000 | |

(d) Income from continuing operationsa $1.72

Loss from discontinued operationsb (.25 )

Income before extraordinary item 1.47

Extraordinary gainc .49

Net income $1.96

a Net income $3,456,000

Deduct extraordinary gain (864,000 )

Add loss from discontinued operations 432,000

Income from continuing operations $3,024,000

|a$3,024,000 |= $1.72 |

|1,762,000 | |

|b$(432,000) |= $(.25) |

|1,762,000 | |

|c$864,000 |= $.49 |

|1,762,000 | |

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