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16.23. EXERCISES

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. Coyle Corp. issued $10,000,000 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. Lambert Company issued $10,000,000 par value 10% bonds at 98. One detachable stock 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 2010. 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, 2010. 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.

E16-2 (Conversion of Bonds) Schuss Inc. issued $3,000,000 of 10%, 10-year convertible bonds on June 1, 2010, at 98 plus accrued interest. The bonds were dated April 1, 2010, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2011, $1,000,000 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

  1. Prepare the entry to record the interest expense at October 1, 2010. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.)

  2. Prepare the entry(ies) to record the conversion on April 1, 2011. (The book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

E16-3 (Conversion of Bonds) Gabel Company has bonds payable outstanding in the amount of $400,000, and the Premium on Bonds Payable account has a balance of $6,000. 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?

E16-4 (Conversion of Bonds) On January 1, 2010, when its $30 par value common stock was selling for $80 per share, Bartz Corp. issued $10,000,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the corporation's common stock. The debentures were issued for $10,600,000. The present value of the bond payments at the time of issuance was $8,500,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2011, the corporation's $30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2012, when the corporation's $15 par value common stock was selling for $135 per share, holders of 20% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums.

Instructions

  1. Prepare the entry to record the original issuance of the convertible debentures.

  2. Prepare the entry to record the exercise of the conversion option, using the book value method. Show supporting computations in good form.

E16-5 (Conversion of Bonds) The December 31, 2010, balance sheet of Osygus Corp. is as follows.



On March 5, 2011, Osygus 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, Osygus Corp. paid the semiannual interest and issued shares of common stock for the bonds. The discount is amortized on a straight-line basis. Osygus uses the book value method.

Instructions

Prepare the entry(ies) to record the interest expense and conversion on April 30, 2011. Reversing entries were made on January 1, 2011.

E16-6 (Conversion of Bonds) On January 1, 2009, Trillini Corporation issued $3,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into eight shares of Trillini Corporation $100 par value common stock after December 31, 2010.

On January 1, 2011, $600,000 of debentures are converted into common stock, which is then selling at $110. An additional $600,000 of debentures are converted on March 31, 2011. 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.

Instructions

Make the necessary journal entries for:

  1. December 31, 2010.

  2. January 1, 2011.

  3. March 31, 2011.

  4. June 30, 2011.

Record the conversions using the book value method.

E16-7 (Issuance of Bonds with Warrants) Prior Inc. has decided to raise additional capital by issuing $175,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $150,000.

Instructions

  1. What entry should be made at the time of the issuance of the bonds and warrants?

  2. If the warrants were nondetachable, would the entries be different? Discuss.

E16-8 (Issuance of Bonds with Detachable Warrants) On September 1, 2010, Jacob Company sold at 104 (plus accrued interest) 3,000 of its 8%, 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 market value can be determined for the Jacob 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.

(AICPA adapted)

E16-9 (Issuance of Bonds with Stock Warrants) On May 1, 2010, Barkley Company issued 3,000 $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 market value of the warrants cannot be determined.

Instructions

  1. Prepare the entry to record the issuance of the bonds and warrants.

  2. Assume the same facts as part (a), except that the warrants had a fair value of $20. Prepare the entry to record the issuance of the bonds and warrants.

E16-10 (Issuance and Exercise of Stock Options) On November 1, 2009, Olympic Company adopted a stock-option plan that granted options to key executives to purchase 40,000 shares of the company's $10 par value common stock. The options were granted on January 2, 2010, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at $40, and the fair value option-pricing model determines the total compensation expense to be $600,000.

All of the options were exercised during the year 2012: 30,000 on January 3 when the market price was $67, and 10,000 on May 1 when the market price was $77 a share.

Instructions

Prepare journal entries relating to the stock-option plan for the years 2010, 2011, and 2012. Assume that the employee performs services equally in 2010 and 2011.

E16-11 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2010, Magilla 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, 2012, by grantees still in the employ of the company, and expiring December 31, 2016. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $400,000.

On April 1, 2011, 3,000 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, 2012, 12,000 options were exercised when the market value of the common stock was $40 per share.

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, 2010, 2011, and 2012.

E16-12 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2009, Scooby Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Scooby's $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2011, if the grantee is still employed by the company at the time of the exercise. On the grant date, Scooby's stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $450,000.

On May 1, 2011, 9,000 options were exercised when the market price of Scooby's stock was $30 per share. The remaining options lapsed in 2013 because executives decided not to exercise their options.

Instructions

Prepare the necessary journal entries related to the stock-option plan for the years 2009 through 2013.

E16-13 (Accounting for Restricted Stock) Derrick Company issues 4,000 shares of restricted stock to its CFO, Dane Yaping, on January 1, 2010. 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, 2011, the fair value of the stock is $145,000.

Instructions

  1. Prepare the journal entries to record the restricted stock on January 1, 2010 (the date of grant) and December 31, 2011.

  2. On March 4, 2012, Yaping leaves the company. Prepare the journal entry (if any) to account for this forfeiture.

E16-14 (Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2010. The stock has a fair value of $500,000 on this date. The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with the company for 5 years. The par value of the stock is $10. At December 31, 2010, the fair value of the stock is $450,000.

Instructions

  1. Prepare the journal entries to record the restricted stock on January 1, 2010 (the date of grant) and December 31, 2011.

  2. On July 25, 2014, Tokar leaves the company. Prepare the journal entry (if any) to account for this forfeiture.

E16-15 (Weighted-Average Number of Shares) Gogean 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 Gogean issued any potentially dilutive securities. Listed below is a summary of Gogean's common stock activities.



Instructions

  1. Compute the weighted-average number of common shares used in computing earnings per common share for 2010 on the 2011 comparative income statement.

  2. Compute the weighted-average number of common shares used in computing earnings per common share for 2011 on the 2011 comparative income statement.

  3. Compute the weighted-average number of common shares to be used in computing earnings per common share for 2011 on the 2012 comparative income statement.

  4. Compute the weighted-average number of common shares to be used in computing earnings per common share for 2012 on the 2012 comparative income statement.

(CMA adapted)

E16-16 (EPS: Simple Capital Structure) On January 1, 2010, Chang Corp. had 480,000 shares of common stock outstanding. During 2010, it had the following transactions that affected the common stock account.



Instructions

  1. Determine the weighted-average number of shares outstanding as of December 31, 2010.

  2. Assume that Chang Corp. earned net income of $3,256,000 during 2010. 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 2010. Compute earnings per share for 2010, using the weighted-average number of shares determined in part (a).

  3. Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2010.

  4. 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 2010.

E16-17 (EPS: Simple Capital Structure) Ott Company had 210,000 shares of common stock outstanding on December 31, 2010. During the year 2011 the company issued 8,000 shares on May 1 and retired 14,000 shares on October 31. For the year 2011 Ott Company reported net income of $229,690 after a casualty loss of $40,600 (net of tax).

Instructions

What earnings per share data should be reported at the bottom of its income statement, assuming that the casualty loss is extraordinary?

E16-18 (EPS: Simple Capital Structure) Kendall Inc. presented the following data.



Instructions

Compute earnings per share.

E16-19 (EPS: Simple Capital Structure) A portion of the statement of income and retained earnings of Pierson Inc. for the current year follows.



At the end of the current year, Pierson Inc. has outstanding 8,000,000 shares of $10 par common stock and 50,000 shares of 6% preferred.

On April 1 of the current year, Pierson Inc. issued 1,000,000 shares of common stock for $32 per share to help finance the casualty.

Instructions

Compute the earnings per share on common stock for the current year as it should be reported to stockholders.

E16-20 (EPS: Simple Capital Structure) On January 1, 2010, Bailey Industries had stock outstanding as follows.



To acquire the net assets of three smaller companies, Bailey authorized the issuance of an additional 170,000 common shares. The acquisitions took place as shown below.



On May 14, 2010, Bailey realized a $90,000 (before taxes) insurance gain on the expropriation of investments originally purchased in 2000.

On December 31, 2010, Bailey recorded net income of $300,000 before tax and exclusive of the gain.

Instructions

Assuming a 40% tax rate, compute the earnings per share data that should appear on the financial statements of Bailey Industries as of December 31, 2010. Assume that the expropriation is extraordinary.

E16-21 (EPS: Simple Capital Structure) At January 1, 2010, Cameron Company's outstanding shares included the following.



Net income for 2010 was $2,830,000. No cash dividends were declared or paid during 2010. On February 15, 2011, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2010.

On April 1, 2010, 450,000 shares of common stock were sold for $10 per share, and on October 1, 2010, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.

Instructions

Compute earnings per share for 2010. Assume that financial statements for 2010 were issued in March 2011.

E16-22 (EPS with Convertible Bonds, Various Situations) In 2010 Buraka Enterprises issued, at par, 75 $1,000, 8% bonds, each convertible into 100 shares of common stock. Buraka had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2011. (Assume that the tax rate is 40%.) Throughout 2011, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.

Instructions

  1. Compute diluted earnings per share for 2011.

  2. Assume the same facts as those assumed for part (a), except that the 75 bonds were issued on September 1, 2011 (rather than in 2010), and none have been converted or redeemed.

  3. Assume the same facts as assumed for part (a), except that 25 of the 75 bonds were actually converted on July 1, 2011.

E16-23 (EPS with Convertible Bonds) On June 1, 2009, Bluhm Company and Amanar Company merged to form Davenport Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2011, the company issued an additional 600,000 shares of stock for cash. All 1,400,000 shares were outstanding on December 31, 2011.

Davenport Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2011. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date.

Davenport Inc. is preparing its annual report for the fiscal year ending December 31, 2011. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.)

Instructions

Determine the following for 2011.

  1. The number of shares to be used for calculating:

    1. Basic earnings per share.

    2. Diluted earnings per share.

  2. The earnings figures to be used for calculating:

    1. Basic earnings per share.

    2. Diluted earnings per share.

(CMA adapted)

E16-24 (EPS with Convertible Bonds and Preferred Stock) The Ottey Corporation issued 10-year, $4,000,000 par, 7% callable convertible subordinated debentures on January 2, 2010. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Ottey's effective tax was 35%. Net income in 2010 was $7,500,000, and the company had 2,000,000 shares outstanding during the entire year.

Instructions

  1. Prepare a schedule to compute both basic and diluted earnings per share.

  2. Discuss how the schedule would differ if the security was convertible preferred stock.

E16-25 (EPS with Convertible Bonds and Preferred Stock) On January 1, 2010, Lindsey Company issued 10-year, $3,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Lindsey common stock. Lindsey's net income in 2011 was $240,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2010. None of the bonds were converted in 2010.

Instructions

  1. Compute diluted earnings per share for 2010.

  2. Compute diluted earnings per share for 2010, assuming the same facts as above, except that $1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Lindsey common stock.

E16-26 (EPS with Options, Various Situations) Zambrano Company's net income for 2010 is $40,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2009, each exercisable for one share at $8. None has been exercised, and 10,000 shares of common were outstanding during 2010. The average market price of Zambrano's stock during 2010 was $20.

Instructions

  1. Compute diluted earnings per share. (Round to the nearest cent.)

  2. Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2010 (rather than in 2009). The average market price during the last 3 months of 2010 was $20.

E16-27 (EPS with Contingent Issuance Agreement) Brooks Inc. recently purchased Donovan Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Donovan's income for 2011 was $110,000 or more, 10,000 additional shares would be issued to Donovan's stockholders in 2012. Donovan's income for 2010 was $125,000.

Instructions

  1. Would the contingent shares have to be considered in Brooks's 2010 earnings per share computations?

  2. Assume the same facts, except that the 10,000 shares are contingent on Donovan's achieving a net income of $130,000 in 2011. Would the contingent shares have to be considered in Brooks's earnings per share computations for 2010?

E16-28 (EPS with Warrants) Werth Corporation earned $260,000 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 30,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrant exercised.

Instructions

  1. Are the warrants dilutive?

  2. Compute basic earnings per share.

  3. Compute diluted earnings per share.

*E16-29 (Stock-Appreciation Rights) On December 31, 2007, Flessel Company issues 120,000 stock-appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of $10. The fair value of the SARs is estimated to be $4 per SAR on December 31, 2008; $1 on December 31, 2009; $11 on December 31, 2010; and $9 on December 31, 2011. The service period is 4 years, and the exercise period is 7 years.

Instructions

  1. Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stock-appreciation rights plan.

  2. Prepare the entry at December 31, 2011, to record compensation expense, if any, in 2011.

  3. Prepare the entry on December 31, 2011, assuming that all 120,000 SARs are exercised.

*E16-30 (Stock-Appreciation Rights) Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2008, on 40,000 SARs. The date of grant is December 31, 2008, and the required employment (service) period is 4 years. President Scott exercises all of the SARs in 2014. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2009; $9 on December 31, 2010; $15 on December 31, 2011; $8 on December 31, 2012; and $18 on December 31, 2013.

Instructions

  1. Prepare a 5-year (2009–2013) schedule of compensation expense pertaining to the 40,000 SARs granted to president Scott.

  2. Prepare the journal entry for compensation expense in 2009, 2012, and 2013 relative to the 40,000 SARs.

See the book's companion website, www.wiley.com/college/kieso, for a set of B Exercises.


  

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