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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.

Short Answer

Expert verified

Cash and discount on bonds payable are to be debited with $2,020,000 and $59,216, respectively. Bonds payable and paid-in Capital- Stock warrants will be credited with $2,000,000 and $79,216, respectively.

Step by step solution

01

The information given in the question are as follows:

Bonds Payable$2,000,000

Discount on Bonds Payable $59,216 ($2,000,000 – $1,940,784)

Fair value of bonds$1,960,000(2,000 X $1,000 X 98)

Fair value of warrants$80,000(2,000 X $40)

Allocated to bonds$1,940,784[($1,960/$2,040) X $2,020,000]

Allocated to warrants$79,216 [($80/$2,040) X $2,020,000]

02

Recording the issuance of the bonds and warrants

Date

Transaction

Debit

Credit

Cash

$2,020,000

Discount on Bonds Payable

$59,216

Bonds Payable

$2,000,000

Paid-in Capital—Stock Warrants

$79,216

Being bonds are issued at discount

Fair value of bonds

$1,960,000

Fair value of warrants

$80,000

Aggregate fair value

$2,040,000

Allocated to bonds

$1,940,784

Allocated to warrants

$79,216

$2,020,000

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Most popular questions from this chapter

CA16-4 WRITING (Stock Compensation Plans) The following two items appeared on the Internet concerning the GAAP requirement to expense stock options.

WASHINGTON, D.C.—February 17, 2005 Congressman David Dreier (R–CA), Chairman of the House Rules Committee, and Congresswoman Anna Eshoo (D–CA) reintroduced legislation today that will preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.

“Last year, the U.S. House of Representatives overwhelmingly voted for legislation that would have ensured the continued ability of innovative companies to offer stock options to rank-and-file employees,” Dreier stated. “Both the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) continue to ignore our calls to address legitimate concerns about the impact of FASB’s new standard on workers’ ability to have an ownership stake in the New Economy, and its failure to address the real need of shareholders: accurate and meaningful information about a company’s use of stock options.”

In December 2004, FASB issued a stock option expensing standard that will render a huge blow to the 21st century economy,” Dreier said. “Their action and the SEC’s apparent lack of concern for protecting shareholders, requires us to once again take a firm stand on the side of investors and economic growth. Giving investors the ability to understand how stock options impact the value of their shares is critical. And equally important is preserving the ability of companies to use this innovative tool to attract talented employees.”

“Here We Go Again!” by Jack Ciesielski (2/21/2005, http://www.accountingobserver.com/blog/2005/02/here-we-go-again) On February 17, Congressman David Dreier (R–CA), and Congresswoman Anna Eshoo (D–CA), officially entered Silicon Valley’s bid to gum up the launch of honest reporting of stock option compensation: They co-sponsored a bill to “preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.” You know what “critical information” they mean: stuff like the stock compensation for the top five officers in a company, with a rigged value set as close to zero as possible. Investors crave this kind of information. Other ways the good Congresspersons want to “help” investors: The bill “also requires the SEC to study the effectiveness of those disclosures over three years, during which time, no new accounting standard related to the treatment of stock options could be recognized. Finally, the bill requires the Secretary of Commerce to conduct a study and report to Congress on the impact of broad-based employee stock option plans on expanding employee corporate ownership, skilled worker recruitment and retention, research and innovation, economic growth, and international competitiveness.”

It’s the old “four corners” basketball strategy: stall, stall, stall. In the meantime, hope for regime change at your opponent, the FASB.

Instructions

(a) What are the major recommendations of the stock-based compensation pronouncement?

(b) How do the provisions of GAAP in this area differ from the bill introduced by members of Congress (Dreier and Eshoo), which would require expensing for options issued to only the top five officers in a company? Which approach do you think would result in more useful information? (Focus on comparability.)

(c) The bill in Congress urges the FASB to develop a rule that preserves “the ability of companies to use this innovative tool to attract talented employees.” Write a response to these Congress-people explaining the importance of neutrality in financial accounting and reporting.

All of the following are key similarities between GAAP and IFRS with respect to accounting for dilutive securities and EPS except:

(a) the model for recognizing stock-based compensation.

(b) the calculation of basic and diluted EPS.

(c) the accounting for convertible debt.

(d) the accounting for modifications of share options, when the value increases.

How is compensation expense computed using the fair value approach?

How is antidilution determined when multiple securities are involved?

Cordero Corporation has an employee stock-purchase plan which permits all full-time employees to purchase 10 shares of common stock on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased and no commission is charged. Discuss whether this plan would be considered compensatory.

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