Chapter 16: Q6IFRS (page 895)
What are the arguments for giving separate accounting recognition to the conversion feature of debentures?
There is an inborn economic value in a conversion feature.
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What type of earnings per share presentation is required in a complex capital structure?
GROUPWORK (Entries for Various Dilutive Securities) The stockholders’ 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 par—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 stockholders’ 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.
IFRS16-3 Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of \(400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of \)35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS.
(a) Prepare the entry to record issuance of the bonds at par under GAAP.
(b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance.
(c) Which approach provides the better accounting? Explain.
EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued \(2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was \)54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.’s \(100 par value common stock for each \)1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.
Instructions
Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following
dates. (Round to the nearest dollar.)
(a) August 1, 2018. (Assume the book value method is used.)
(b) August 31, 2018.
(c) December 31, 2018, including closing entries for end-of-year.
How is compensation expense computed using the fair value approach?
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