Chp 15 HW Solutions 15-11

Chp 15 HW Solutions 15-11 - EXERCISE 15-4(2025 minutes(a(1...

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EXERCISE 15-4 (20–25 minutes) (a) (1) Unamortized Bond Issue Costs ($340,000 X $500/$850). ................................. 200,000 Cash ($850 X 9,600). .......................................... 8,160,000 Bonds Payable. .......................................... 5,000,000 Common Stock (100,000 X $5). ................. 500,000 Paid-in Capital in Excess of Par. .............. 2,860,000 Assumes bonds are properly priced and issued at par; the residual attributed to common stock has a questionable measure of fair value. Incremental method Lump-sum receipt (9,600 X $850). ............................. $8,160,000 Allocated to subordinated debenture (9,600 X $500). .......................................................... 4,800,000 Balance allocated to common stock. ........................ $3,360,000 Computation of common stock and paid-in capital Balance allocated to common stock. ........................ $3,360,000 Less: Common stock (10,000 X $5 X 10). ................. 500,000 Paid-in capital in excess of par. ................................ $2,860,000 Lump-sum receipt (10,000 X $850). ........................... $8,500,000 Allocated to debenture (10,000 X $500). ................... 5,000,000 Balance allocated to common stock. ........................ $3,500,000
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Bond issue cost allocation Total issue cost (400 X $850). .................................... $340,000 Less: Amount allocated to bonds. ............................ 200,000 Amount allocated to common. .................................. $140,000 Investment banking costs 400 @ $850 = $340,000 allocate 5/8.5 to debentures and 3.5/8.5 to common stock. Bond portion is bond issue costs; common stock portion is a reduction of paid-in capital, which means that total paid-in capital is $3,360,000 ($3,500,000 – $140,000). (2) Cash. ................................................................... 8,160,000 Unamortized Bond Issue Costs. ...................... 188,889 Bond Discount ($5,000,000 – $4,722,222). ...... 277,778 Bonds Payable. .......................................... 5,000,000 Common Stock (100,000 X $5). ................. 500,000 Paid-in Capital in Excess of Par. .............. 3,126,667 The allocation based on fair value for one unit is Subordinated debenture. .......................... $500 Common stock (10 shares X $40). ........... 400 Total fair value. ........................................... $900 Therefore 5/9 is allocated to the bonds and 4/9 to the common stock. $8,500,000 X (5/9) = $4,722,222 To Debentures $8,500,000 X (4/9) = $3,777,778 To Common $340,000 X (5/9) = $188,889 $340,000 X (4/9) = $151,111
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Paid-in capital in excess of par = $3,777,778 – $500,000 – $151,111 = $3,126,667 (b) One is not better than the other, but would depend on the relative reliability of the valuations for the stocks and bonds. This question is presented to stimulate some
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This note was uploaded on 10/03/2011 for the course ACCOUNTING 103 taught by Professor Ngo during the Spring '11 term at Berkeley.

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Chp 15 HW Solutions 15-11 - EXERCISE 15-4(2025 minutes(a(1...

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