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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

Short Answer

Expert verified

Answer

(a) Bond Interest Expense and Premium on Bonds Payable will be debited. Cash will be credited.

(b) Bonds Payable and Premium on Bonds Payable will be debited. Common Stock and Paid-in Capital in Excess of Par will be credited.

(c) Bond Interest Expense, Premium on Bonds Payable, Bond Interest Payable and Bonds Payable will be debited. Premium on Bonds Payable, Common Stock and Paid-in Capital in Excess of Par will be credited.

(d) Bond Interest Expense, Premium on Bonds Payable, and Bond Interest Payable will be debited. Cash will be credited.

Step by step solution

01

(a) Journal entry

Date

Description

DEBIT

CREDIT

December 31, 2018

Bond Interest Expense

$156,000

Premium on Bonds ($80,000 x 1/20)

$4,000

Cash ($4,000,000 X 8% X 6/12)

$160,000

Being interest expense recorded

02

(b) Journal Entry

Date

Description

DEBIT

CREDIT

January 1, 2019

Bonds Payable

$400,000

Premium on Bonds (64,000*10%)

$6,400

Common Stock [8 X $100 X ($400,000/$1,000)]

$320,000

Paid-in Capital in Excess of Par (80,000+6,400)

$86,400

Being bonds are converted into common stock

03

(c) Journal entry

Date

Description

DEBIT

CREDIT

March 31, 2019

Bond Interest Expense

$7,800

Premium on Bonds [(6400/8) x 3/12]

$200

Bond Interest Payable (400,000 x 8% x 3/12)

$8,000

Being interest expense are recorded

Bonds Payable

$400,000

Premium on Bonds Payable (6400-200)

$6,200

Common Stock

320,000

Paid-in Capital in Excess of Par

86,200

Being $400,000 of debentures are converted on March 31, 2019

04

(d) Journal entry

Date

Description

DEBIT

CREDIT

June 30, 2019

Bond Interest Expense

$124,800

Premium on Bonds Payable (80,000 x 80% x 1/20)

$3,200

Bond Interest Payable (400,000 x 8% x 1/4)

$8,000

Cash [(3,200,000 x 8% x 1/2) +8000]

$136,000

Being interest on bonds payable paid

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Most popular questions from this chapter

Over what period of time should compensation cost be allocated?

On July 1, 2017, Roberts Corporation issued \(3,000,000 of 9% bonds payable in 20 years. The bonds include detachable warrants giving the bondholder the right to purchase for \)30 one share of \(1 par value common stock at any time during the next 10 years. The bonds were sold for \)3,000,000. The value of the warrants at the time of issuance was $100,000. Prepare the journal entry to record this transaction.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the companyโ€™s \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price 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, 2018, 2019, and 2020.

Briefly explain the accounting requirement for stock compensation plans under GAAP.

GROUPWORK (Entries for Various Dilutive Securities) The stockholdersโ€™ equity section of Martino Inc. at the beginning of the current year appears below.

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

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of parโ€”common stock 600,000

Retained earnings 570,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at \(32. The rights were void after 30 days. The market price of the stock at this time was \)34 per share.

2. The company sold to the public a \(200,000, 10% bond issue at 104. The company also issued with each \)100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at \(30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at \)8.

3. All but 5,000 of the rights issued in (1) were exercised in 30 days.

4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing.

5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives.

The company, using a fair value option-pricing model, determines that each option is worth \(10. The option price is \)30.

The options were to expire at year-end and were considered compensation for the current year.

6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

(a) Prepare general journal entries for the current year to record the transactions listed above.

(b) Prepare the stockholdersโ€™ equity section of the balance sheet at the end of the current year. Assume that retained earnings

at the end of the current year is $750,000.

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