Question

Wildhorse Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Wildhorse Corp. has issued 13,000 units. Each unit consists of a $650 par, 12% subordinated debenture and 13 shares of $7 par common stock. The units were sold to outside investors for cash at $1,144 per unit. Prior to this sale, the 2-week ask price of common stock was $52 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

(a) Prepare the journal entry to record Wildhorse’s transaction, under the following conditions. (Round answers to 0 decimal places, e.g. $38,487. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

(1)		Employing the incremental method.
(2)		Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.

No.	Account Titles and Explanation	Debit	Credit
1.	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
2.	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

Answer 1

First we analyse the given information,

A) Cash received from selling of units = 13000*1144 = 14,872,000

B) Bonds payable = 13000*650                                       = 8,450,000

C) Common stock allotted = 13000*13*7 = 1,183,000

Employing the incremental method

D) Paid in capital in excess of par-common stock = (A-B-C) = 5,239,000

Employing the proportional method

The allocation based on fair value of one unit is

Debentures = 650

Common stock = 13*52 = 676

Total fair value = 1326

Allocation to

E) Debentures                      = 14,872,000*650/1326 = 7,290,196

F) Common stock                = 14,872,000*676/1326 = 7,581,804

So, Bonds discount can be calculated as = Bonds payable (B) – allocated value to debentures (E) = 8,450,000 - 7,290,196 = 1,159,804

G) Bonds discount = 1,159,804

H) Paid in capital in excess of par-common stock = Fair value allocation to common stock (F) – Common stock (C) = 7,581,804 - 1,183,000 = 6,401,801

Journal entry to record Wild horse’s transaction

1) Employing the incremental method

General journal	Debit	Credit
Cash (A)	14,872,000
Bonds payable (B)		8,450,000
Common stock (C)		1,183,000
Paid in capital in excess of par-common stock (D) (Balance fig)		5,239,000

2) Employing the proportional method

General journal	Debit	Credit
Cash (A)	14,872,000
Bonds Discount (G)	1,159,804
Bonds payable (B)		8,450,000
Common stock (C)		1,183,000
Paid in capital in excess of par-common stock (H)		6,398,804