Question

Exercise 15-4 Concord Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Concord Corp. has issued 22,500 units. Each unit consists of a $1,125 par, 12% subordinated debenture and 23 shares of $11 par common stock. The units were sold to outside investors for cash at $1,980 per unit. Prior to this sale, the 2-week ask price of common stock was $90 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 Concord’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. Cash Bonds Payable Common Stock Paid-in Capital in Excess of Par - Common Stock 2. Discount on Bonds Payable Bonds Payable Common Stock common

Answer 1

Answer:

(1) Employing the incremental method:

Amount received = 22,500 units * $1,980 = $44,550,000

Less, Allocated to subordinated debenture = 22,500 * $1,125 = $25,312,500

Balance allocated to common stock = $44,550,000 - $25,312,500 = $19,237,500

Computation of common stock and paid-in capital:

Common stock = 22,500 * 23 * $11 = $5,692,500

Paid-in Capital in Excess of Par - Common Stock = $19,237,500 - $5,692,500 = $13,545,000

The journal entry is:

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

Each unit consists of a $1,125 par, 12% subordinated debenture and 23 shares of $11 par common stock. The units were sold to outside investors for cash at $1,980 per unit.

Subordinate Debenture = $1,125

Common stock (23 * $90) = $2,070

Total fair value = $1,125 + $2,070 =$3,195

Since  units were sold to outside investors for cash at $1,980 per unit, total amount received = 22,500 * $1,980 = $44,550,000.

This amount needs to be split:

Amount allocated to Common stock = ($2,070 / $3,195) * $44,550,000.= $28,863,380

Amount allocated to subordinated debenture = ($1.125 / $3,195) * $44,550,000.= $15,686,620

Common stock par value = $11 * 23 shares * 22,500 units = $5,692,500

Paid-in Capital in Excess of Par - Common Stock = $28,863,380 - $5,692,500 = $23,170,880

Bonds payable = $1,125 * 22,500 = $25,312,500

Discount on Bonds Payable = $25,312,500 - $15,686,620 = $9,625,880

The Journal entry is: