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## ACCOUNTING ASSIGNMENT Case Solution

The options were granted as compensation for executive’s services to be rendered over a 2-year period beginning January 1 2014. The fair value option pricing model determines total compensation expense to be \$100,000. What amount of compensation expense should company recognize as a result of this plan for the year ended December 31 2015 under the fair value method?

1. 50000
2. 100000
3. 110000
4. 350000

At December 31 2014 The A company has 100,000 share of common stock issued and outstanding. On April 1 2015 an additional 20,000 shares of common stock wereissued. A net income for the year ended December 31 2015 was \$690,000. During the 2016 A declared and paid \$400,000 cash dividends on its nonconvertible preferred stock. The earnings per common share, rounded to the nearest penny, for 2015 should be?

1. 52
2. 64
3. 28
4. Other. The Answer is _______Other

A corporation’s capital structure at Dec 31 2014 was as follows.

Shares Issued Outstanding
Common Stock                                   480,000
Nonconvertible preferred Stock         100,000

On Sept 1 2015 A issued a 10% stock dividend on its common stock and paid a cash dividend of \$2 per share on its preferred stock. Net income for the year ended December 31 2015 was \$3,120,000. What should be A’s 2015 earnings per common share to the nearest penny?

1. 89
2. 91
3. 08
4. 50

A corporation owns 5,000 bonds on B company. The investment in bonds cost \$5,200,000 and is now worth \$5,600,000. A has a balance in its common stock account of 3,600,000 (360,000 shares with a par value of \$10 per share). A is currently holding 10,000 shares of common stock.

A declares a property dividend whereby stockholders will receive 1 bond (of B Company) for each 100 shares of stock hold.

1. Prepare journal entries necessary at the date of declaration

Solution:

Bond Payable Debit (360000/100)*(5600000/5000) = 4032000

Cash Credit = 4032000

1. Prepare journal entries necessary when the bonds are distributed to the stockholders.

Solution:

Cash Debit = 4032000

Bonds Payable = 4032000

On 10/1/11 A Corporation issued \$1,500,000 of 10 years, 11% convertible bonds at 103. Interest is paid semi-annually on 3/31 and 9/30. Each \$1000 bond can be converted into 15 common shares of A Corporation \$50 par value common stock. On 10/1/15 \$450,000 of bonds is converted into common stock. Which is then selling at \$72. Bond discount or premium is amortized on a straight line basis.

Required: Prepare the 10/1/15 journal entry for conversion of bonds used the book value method.

Solution:

Bond Payable Debt (450000/1000 x 15) x 72 = 486000

Unamortized bond Premium Credit (450000/1000 x 15) x 103 = 695920 – 486000 = 209250

Common Stock Credit = 486000

Paid up Capital Credit = 209250

A Corp has decided to raise additional capital by issuing \$300,000 face value of bonds with a coupon rate of 10%. In discussion with their investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each \$100 bond sold. The value of the bonds without the warrants is considered to be \$279000 and the value of the warrants in the market is \$31000. The bonds sold in the market at issuance for \$306,000.

Prepare the journal entries to record the issuance of the bonds and warrants.

Solution:

Cash Debit = 306000

Discount on Bond Payable Debit 279000+31000-306000 = 4000

Warrant Credit= 31000

Bonds Payable Credit= 279000

The next part requires answers to contain proper disclosures of earnings per share on that company 2015 income statement with all appropriate words and amounts. The 3 situation are unrelated.

On 1/1/15 A Company had outstanding 150,000 shares of common stock. On 3/1/15 B purchased 30,000 shares of treasury stock, which we reissued on 7/1/15. During 2015 net income was \$850,000 and dividends of \$73,000 were paid on its non-convertible preferred stock. The effective income tax rate is 30%. The following potential dilutive items were outstanding at the end of 2015.

1. 10% convertible bonds (\$2,000,000) issued at 100 on 1/1/13. Each \$1000 bond is convertible into 10 share of common stock. No bonds have been converted as of 12/31/15.
2. Options to purchase 30,000 shares at \$50 per share were issued on 4/1/16. The average market price of the stock during the year was \$60 and the 12/31/15 market price was \$90. The average price during the last nine months of the year was \$75.

Computations and Explanations.

Solution:

The total outstanding shares after the purchase of the treasury stock by B would be as follows:

150000 – 30000 = 120000 outstanding shares

No bonds have been converted but the options to purchase 30000 shares would be exercised as the option is in the money. The new outstanding shares would be:

120000 – 30000 = 90000 outstanding shares

Net Income less dividends on non-convertible preferred stock would be as follows:

850000 -73000 = \$777000

The EPS would be:

\$777000/90000 = \$8.63