Chapter 16 Homework Solutions - Copy (2) - Copy

CHAPTER 16

BE16-1 Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not

included the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance

of the bonds.

BE16-2 Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of $10

par value common stock. The bonds are converted on December 31, 2014, when the unamortized discount

is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book value

approach.

BE16-3 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.

BE16-4 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.

BE16-5 McIntyre Corporation issued 2,000 $1,000 bonds at 101. Each bond was issued with one detachable

stock warrant. After issuance, the bonds were selling separately at 98. The market price of the warrants

without the bonds cannot be determined. Use the incremental method to record the issuance of the bonds

and warrants.

BE16-6 On January 1, 2014, Barwood Corporation granted 5,000 options to executives. Each option entitles

the holder to purchase one share of Barwoods $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 Barwoods journal

entries for January 1, 2014, and December 31, 2014 and 2015.

BE16-7 Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that

instead of options, Barwood granted 2,000 shares of restricted stock.

BE16-8 On January 1, 2014 (the date of grant), Lutz Corporation issues 2,000 shares of restricted stock to its

executives. The fair value of these shares is $75,000, and their par value is $10,000. The stock is forfeited if

the executives do not complete 3 years of employment with the company. Prepare the journal entry (if any)

on January 1, 2014, and on December 31, 2014, assuming the service period is 3 years.BRIEF EXERCISE 16-1

Cash

3,960,000

Discount on Bonds Payable

40,000

Bonds Payable

4,000,000

BRIEF EXERCISE 16-2

Bonds Payable

2,000,000


30,000

Common Stock (2,000 X 50 X $10)

1,000,000

Paid-in Capital in Excess of Par

Common Stock

970,000

BRIEF EXERCISE 16-3

Preferred Stock (1,000 X $50)

50,000


Preferred Stock ($60 $50) X 1,000

10,000

Common Stock (2,000 X $10)

20,000

Paid-in Capital in Excess of ParCommon

Stock ($60 X 1,000) (2,000 X $10)

40,000

BRIEF EXERCISE 16-4

Cash

2,020,000


($2,000,000 $1,940,784)

59,216

Bonds Payable

2,000,000

Paid-in CapitalStock Warrants

79,216

Fair value of bonds (2,000 X $1,000 X .98)

$1,960,000

Fair value of warrants (2,000 X $40)

80,000

Aggregate fair value

$2,040,000

Allocated to bonds [($1,960/$2,040) X $2,020,000]

$1,940,784

Allocated to warrants [($80/$2,040) X $2,020,000]

79,216

$2,020,000BRIEF EXERCISE 16-5

Cash

2,020,000


[$2,000,000 X (1 .98)]

40,000

Bonds Payable

2,000,000


60,000*

*$2,000,000 X (1.01 .98)

BRIEF EXERCISE 16-6

1/1/14

No entry

12/31/14Compensation Expense

75,000

Paid-in CapitalStock

Options

75,000


75,000

Paid-in CapitalStock

Options

75,000

BRIEF EXERCISE 16-7

1/1/14

Unearned Compensation

130,000


10,000

Paid in Capital in Excess of Par

Common Stock

[($65 $5) X 2,000]

120,000


65,000


65,000


65,000


65,000

BRIEF EXERCISE 16-8

1/1/14


75,000

Common Stock

10,000


Common Stock

65,000


25,000

Unearned Compensation ($75,000 3)

25,000

EXERCISE 16-1 (1520 minutes)

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 companys 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. Suppose Sepracor, Inc. called its convertible debt in 2014. 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, 2014. 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


200,000

Bonds Payable

20,000,000

Unamortized Bond Issue Costs

70,000

Cash

70,000

2.Cash

19,600,000


1,200,000

Bonds Payable

20,000,000


800,000

Value of bonds

plus warrants

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

Less: Value of warrants

(200,000 X $4) 800,000

Value of bonds$18,800,0003.Debt Conversion Expense

75,000

Bonds Payable

10,000,000


55,000

Common Stock

1,000,000


8,945,000*

Cash

75,000

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


E16-2 (Conversion of Bonds) Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1,

2014, at 98 plus accrued interest. The bonds were dated April 1, 2014, with interest payable April 1 and

October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2015, $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.

Instructions

(a) Prepare the entry to record the interest expense at October 1, 2014. 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, 2015. (Book value method is used.)

Assume that the entry to record amortization of the bond discount and interest payment has been

made.(a)Interest Payable ($200,000 X 2/6)

66,667

Interest Expense ($200,000 X 4/6) + $2,712

136,045


2,712

Cash ($4,000,000 X 10% 2)

200,000

Calculations:

Par value$4,000,000

Issuance price 3,920,000

Total discount$ 80,000

Months remaining118

Discount per month$678

($80,000 118)

Discount amortized$2,712

(4 X $678)

(b)Bonds Payable

1,500,000


27,458


600,000


872,542*

*($1,500,000 $27,458) $600,000

Calculations:

Discount related to 3/8 of

the bonds ($80,000 X 3/8)$30,000

Less: Discount amortized

[($30,000 118) X 10] 2,542

Unamortized bond discount$27,458


E16-3 (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 par value of $50 per share. All bonds are converted into preferred stock.

Instructions

Assuming that the book value method was used, what entry would be made?Conversion recorded at book value of the bonds:

Bonds Payable

500,000

Premium on Bonds Payable

7,500

Preferred Stock (500 X 20 X $50)

500,000


(Preferred Stock)

7,500


E16-8 (Issuance of Bonds with Detachable Warrants) On September 1, 2014, 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.

Instructions

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

Journal Entry

September 1, 2014Cash

4,220,000

Unamortized Bond Issue Costs

30,000

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

4,000,000

Premium on Bonds PayableSchedule 1

136,000


Schedule 1

24,000

Bond Interest ExpenseSchedule 2

90,000

(To record the issuance of the bonds)

Schedule 1

Premium on Bonds Payable and Value of Stock WarrantsSales price (4,000 X $1,040)$4,160,000

Less: Face value of bonds 4,000,000

160,000

Deduct value assigned to stock warrants

(4,000 X 2 = 8,000; 8,000 X $3) 24,000Premium on bonds payable$ 136,000Schedule 2

Accrued Bond Interest to Date of Sale

Face value of bonds$4,000,000

Interest rate X 9%Annual interest$ 360,000

Accrued interest for 3 months ($360,000 X 3/12)$ 90,000EXERCISE 16-9 (1015 minutes)

E16-9 (Issuance of Bonds with Stock Warrants) On May 1, 2014, 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.(a)Cash ($2,000,000 X 1.02)

2,040,000


40,000

[(1 .98) X $2,000,000]

Bonds Payable

2,000,000


80,000*

*$2,040,000 ($2,000,000 X .98)

(b)Market value of bonds without warrants$1,960,000

($2,000,000 X .98)

Market value of warrants (2,000 X $30) 60,000

Total market value$2,020,000$1,960,000X $2,040,000 = $1,979,406 Value assigned to bonds

$2,020,000

$60,000X $2,040,000 = $ 60,594Value assigned to warrants

$2,040,000Total

$2,020,000

Cash

2,040,000


20,594

Bonds Payable

2,000,000


60,594


E16-12 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2013, Nichols Corporation

granted 10,000 options to key executives. Each option allows the executive to purchase one share of

Nichols $5 par value common stock at a price of $20 per share. The options were exercisable within a

2-year period beginning January 1, 2015, if the grantee is still employed by the company at the time of the

exercise. On the grant date, Nichols stock was trading at $25 per share, and a fair value option-pricing

model determines total compensation to be $400,000.

On May 1, 2015, 8,000 options were exercised when the market price of Nichols stock was $30

per share. The remaining options lapsed in 2017 because executives decided not to exercise their

options.

Instructions

Prepare the necessary journal entries related to the stock option plan for the years 2013 through 2017.1/1/13No entry


200,000

Paid-in CapitalStock Options

200,000

($400,000 X 1/2)


200,000


200,000

5/1/15Cash (8,000 X $20)

160,000


320,000*


40,000

Paid-in Capital in Excess of

ParCommon Stock

440,000

*($400,000 X 8,000/10,000)

1/1/17Paid-in CapitalStock Options

80,000

Paid-in CapitalExpired Stock

Options ($400,000 $320,000)

80,000


E16-13 (Accounting for Restricted Stock) Derrick Company issues 4,000 shares of restricted stock

to its CFO, Dane Yaping, on January 1, 2014. The stock has a fair value of $120,000 on this date. The

service period related to this restricted stock is 4 years. Vesting occurs if Yaping stays with the

company for 4 years. The par value of the stock is $5. At December 31, 2015, the fair value of the stock

is $145,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2014 (the date of grant), and

December 31, 2015.

(b) On March 4, 2016, Yaping leaves the company. Prepare the journal entry (if any) to account for this

forfeiture.(a)1/1/14Unearned Compensation

120,000


20,000

Paid-in Capital Excess of Par

Common stock

100,000


30,000

Unearned Compensation ($120,000 4)

30,000

(b)3/4/16Common Stock

20,000

Paid-in Capital Excess of Par

100,000


60,000

Compensation Expense (2 X $30,000)

60,000

16-10Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e, Solutions Manual(For Instructor Use Only)Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e, Solutions Manual(For Instructor Use Only) 16-1

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Chapter 16 Homework Solutions - Copy (2) - Copy