Eisler Corporation issued 2,460 $1,000 bonds at 102. 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 $44. Use the proportional method to record the issuance of the bonds and warrants.

Account Title and Explanation	Debit	Credit
Cash Discount on Bonds Payable Bonds Payable Paid in Capital Stock Warrant	$2,509,200 $58,617	$2,460,000 $107,817

Bonds: 2460 × $1000 × $0.98 = $2,410,800

Percentage is 96%

Warrants: 2460 × $44 = $1080, 240

Percentage is 4%

Total market price = $2,519,040

Allocations:

Issue price for bonds = 2460 × $1000 × 1.01 = $2,509,200

Allocation % = 96%, Total = $2,401,383

Issue price for warrants = $2,509,200

Allocation % = 4%, Total = $107,817

Bond face value = $2,460,000

Allocation FMV = $2,401,383

Discount = $58,617

Brief Exercise 16-9

Kalin Corporation had 2014 net income of $1,222,500. During 2014, Kalin paid a dividend of $4 per share on 80,311 shares of preferred stock. During 2014, Kalin had outstanding 230,500 shares of common stock.

Compute Kalin’s 2014 earnings per share.

Earnings per share (EPS) = Net income – (shares × per share)/shares outstanding

EPS= $1,222,500 – (80,311 × $4)/230,500

= $3.91 per share

Exercise 16-2

Aubrey Inc. issued $5,876,400 of 8%, 10-year convertible bonds on June 1, 2014, at 98 plus accrued interest. The bonds were dated April 1, 2014, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 2015, $2,203,650 of these bonds were converted into 34,500 shares of $16 par value common stock. Accrued interest was paid in cash at the time of conversion.

(a)

Prepare the entry to record the interest expense at October 1, 2014. Assume that accrued interest payable was credited when the bonds were issued.

 

Account Title and Explanation	Debit	Credit
Interest Payable ($293,820 × 2/6) Interest Expense ($293,820 × 4/6) + $3,984 Discount on Bonds Payable Cash (5,876,400 × 10%/2)	$97,940 $199,864	$3,984 $293,820

Calculations

Par value = $5,876,400

Interest paid on Oct.1: $5,876,400 × 10%/2 = $293,820

Issuance price $5,758,876

Total discount = $117,528

Months remaining = 118

Discount per month = $117,528 ÷118 = $996

Discount Amortized = $996 ×4 = $3,984

(b)

Prepare the entry to record the conversion on April 1, 2015. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

 

Account Title and Explanation	Debit	Credit
Bonds Payable Discounts on Bonds Payable Common Stock (34,500× $16) Paid in Capital in Excess of Par	$2,203,650	$40,338 $552,000 $1,611,312

 

Calculations:

Discount related to 3/8 of the bonds ($117,528) = $44,073

Less discount amortized ($44,073 ÷118) ×10 = $3,735

Unamortized bond discount = $40,338

Exercise 16-20

On January 1, 2014, Lennon Industries had stock outstanding as follows.

6% Cumulative preferred stock, $106 par value,   issued and outstanding 10,400 shares		$1,102,400
Common stock, $12 par value, issued and   outstanding 273,600 shares		3,283,200

To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 252,000 common shares. The acquisitions took place as shown below.

Date of Acquisition		Shares Issued
Company A April 1, 2014		103,200
Company B July 1, 2014		123,600
Company C October 1, 2014		25,200

On May 14, 2014, Lennon realized a $145,200 (before taxes) insurance gain on the expropriation of investments originally purchased in 2000.

On December 31, 2014, Lennon recorded net income of $412,800 before tax and exclusive of the gain.

Assuming a 47% tax rate, compute the earnings per share data that should appear on the financial statements of Lennon Industries as of December 31, 2014. Assume that the expropriation is extraordinary.

	Date	Shares	Fraction	Weighted
Shares outstanding Issued shares   Issued shares   Issued shares	01/01/14 04/01/14   07/01/14   10/01/14	273,600 103,200 376,800 123,600 500,400 25,200 525,600	0.25   0.25   0.25   0.25	68,400   94,200   125,100   131,400

 

Weighted average outstanding shares = 419,100

Income before taxes and extraordinary items              $412,800

Preferred dividends:                       $1,102,400 ×0.06 = $66,144

Income before extraordinary item: $412,800 × (1-0.47) = $218,784

Extraordinary gain, net of tax:         $145,200 × (1-0.47) = $76,956

Net income: $295,740

Income tax ($412,800 × 0.47) = $194,016

Income allocable to common, before extraordinary item

=$218,784 – $66,144 = $152,640

Income allocable to common, after extraordinary item

=$295,634 – $66,144 = $229,490

EPS before extraordinary = 152,640/419,100 = 0.37

EPS after extraordinary = 229,490/419,100 = 0.55

Extraordinary item, net of tax = 76,956/419,100 = 0.18

Lennon Industries Income Statement For the year ended December 31, 2014

Earnings per share: Income before extraordinary item                                                    0.37 extraordinary item, net of tax                                                            0.18 Total earnings per share                                                                    0.55

 

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