Dahl Co. issued $5,000,000 of 12%, 5-year convertible bonds on December 1, 2006 for $5,020,800 plus accrued interest. The bonds were dated April 1, 2006 with interest payable April 1 and October 1. Bond premium is amortized each interest period on a straight-line basis. Dahl Co. has a fiscal year end of September 30.
On October 1, 2007, $2,500,000 of these bonds were converted into 35,000 shares of $15 par common stock. Accrued interest was paid in cash at the time of conversion.
(a) Prepare the entry to record the interest expense at April 1, 2007. Assume that interest payable was credited when the bonds were issued (round to nearest dollar).
(b) Prepare the entry to record the conversion on October 1, 2007. Assume that the entry to record amortization of the bond premium and interest payment has been made.
Ex. 16-121—Convertible Bonds.
Linn Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value common stock that had a market price of $40 per share. How should Linn Co. account for the conversion of the bonds into common stock under the book value method? Discuss the rationale for this method.
Ex. 16-122—Convertible Debt and Debt with Warrants (Essay).
What accounting treatment is required for convertible debt? Why? What accounting treatment is required for debt issued with stock warrants? Why?
Ex. 16-123—Stock options.
Prepare the necessary entries from 1/1/07-2/1/09 for the following events using the fair value method. If no entry is needed, write "No Entry Necessary."
1. On 1/1/07, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 12,000 shares of common stock at $40 per share. The par value is $10 per share.
2. On 2/1/07, options were granted to each of five executives to purchase 12,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/09. It is assumed that the options were for services performed equally in 2007 and 2008. The Black-Scholes option pricing model determines total compensation expense to be $1,300,000.
3. At 2/1/09, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited.
Ex. 16-124—Weighted average shares outstanding.
On January 1, 2007, Yarrow Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation purchased on the market 600,000 of its own outstanding shares and retired them.
Compute the weighted average number of shares to be used in computing earnings per share for 2007.
Ex. 16-125—Earnings Per Share. (Essay)
Define the following:
(a) The computation of earnings per common share
(b) Complex capital structure
(c) Basic earnings per share
(d) Diluted earnings per share
Ex. 16-126—Earnings per share.
Ramirez Corporation has 400,000 shares of common stock outstanding throughout 2007. In addition, the corporation has 5,000, 20-year, 7% bonds issued at par in 2005. Each $1,000 bond is convertible into 20 shares of common stock after 9/23/08. During the year 2007, the corporation earned $600,000 after deducting all expenses. The tax rate was 30%.
Compute the proper earnings per share for 2007.
Ex. 16-127—Diluted earnings per share.
Brewer Company had 400,000 shares of common stock outstanding during the year 2007. In addition, at December 31, 2007, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise (options granted in 2005). The average market price during 2007 was $50.
Compute the number of shares to be used in determining diluted earnings per share for 2007.
*Ex. 16-128—Stock appreciation rights.
On January 1, 2006, Rye Co. established a stock appreciation rights plan for its executives. They could receive cash at any time during the next four years equal to the difference between the market price of the common stock and a preestablished price of $16 on 300,000 SARs. The market price is as follows: 12/31/06—$21; 12/31/07—$18; 12/31/08—$19; 12/31/09—$20. On December 31, 2008, 50,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2009.
(a) Prepare a schedule that shows the amount of compensation expense for each of the four years starting with 2006.
(b) Prepare the journal entry at 12/31/07 to record compensation expense.
(c) Prepare the journal entry at 12/31/09 to record the exercise of the remaining SARs.
Pr. 16-129—Convertible bonds and stock warrants.
For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions.
1. On August 1, 2007, Ryan Corporation called its 10% convertible bonds for conversion. The $8,000,000 par bonds were converted into 320,000 shares of $20 par common stock. On August 1, there was $700,000 of unamortized premium applicable to the bonds. The fair market value of the common stock was $20 per share. Ignore all interest payments.
2. Garnett, Inc. decides to issue convertible bonds instead of common stock. The company issues 10% convertible bonds, par $3,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94.
3. Lopez Company issues $5,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $4,935,000 and the value of the warrants is $315,000. The bonds with the warrants sold at 101.
Pr. 16-130—Earnings per share.
Adcock Corp. had $500,000 net income in 2007. On January 1, 2007 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 shares of treasury stock. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2007. The tax rate is 40%.
During 2007, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock.
Adcock issued $2,000,000 of 8% convertible bonds at face value during 2006. Each $1,000 bond is convertible into 30 shares of common stock.
Compute diluted earnings per share for 2007. Complete the schedule and show all computations.
Net Adjust- Adjusted Adjust- Adjusted
Security Income ment Net Income Shares ment Shares EPS
Pr. 16-131—Basic and diluted EPS.
Assume that the following data relative to Eddy Company for 2007 is available:
Net Income $2,100,000
Transactions in Common Shares Change Cumulative
Jan. 1, 2007, Beginning number 700,000
Mar. 1, 2007, Purchase of treasury shares (60,000) 640,000
June 1, 2007, Stock split 2-1 640,000 1,280,000
Nov. 1, 2007, Issuance of shares 120,000 1,400,000
8% Cumulative Convertible Preferred Stock
Sold at par, convertible into 200,000 shares of common
(adjusted for split). $1,000,000
Exercisable at the option price of $25 per share. Average
market price in 2007, $30 (market price and option price
adjusted for split). 60,000 shares
(a) Compute the basic earnings per share for 2007. (Round to the nearest penny.)
(b) Compute the diluted earnings per share for 2007. (Round to the nearest penny.)
Pr. 16-132—Basic and diluted EPS.
Presented below is information related to Berry Company.
1. Net Income [including an extraordinary gain (net of tax) of $70,000] $230,000
2. Capital Structure
a. Cumulative 8% preferred stock, $100 par,
6,000 shares issued and outstanding $600,000
b. $10 par common stock, 74,000 shares outstanding on January 1.
On April 1, 40,000 shares were issued for cash. On October 1,
16,000 shares were purchased and retired. $1,000,000
c. On January 2 of the current year, Berry purchased Raye Corporation.
One of the terms of the purchase was that if Berry 's net income for the
following year is $2400,000 or more, 50,000 additional shares would
be issued to Raye stockholders next year.
3. Other Information
a. Average market price per share of common stock during entire year $30
b. Income tax rate 30%
Compute earnings per share for the current year.
Pr. 16-133—Basic and diluted EPS.
The following information was taken from the books and records of Simonic, Inc.:
1. Net income $ 280,000
2. Capital structure:
a. Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible
into 50 shares of common stock at the present date and for the next
10 years. 300,000
b. $10 par common stock, 200,000 shares issued and outstanding
during the entire year. 2,000,000
c. Stock warrants outstanding to buy 16,000 shares of common stock
at $20 per share.
3. Other information:
a. Bonds converted during the year None
b. Income tax rate 30%
c. Convertible debt was outstanding the entire year
d. Average market price per share of common stock during the year $32
e. Warrants were outstanding the entire year
f. Warrants exercised during the year None
Compute basic and diluted earnings per share.
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