Question

1. Augustus LTD currently has outstanding 20,000 no par value common shares with a carrying value of $200,000, and 10,000 no par value, $0.60, cumulative fully participating preferred shares with a carrying value of $100,000. Dividends on the preferred shares are one year in arrears. Assuming that Augustus wishes to distribute $54,000 in dividends, the common shareholders will receive:

1. $12,000
2. $22,000
3. $32,000
4. $42,000

1. During 2017, Cayden Corp. issued four hundred $1,000 bonds at 104. One detachable warrant, entitled the holder to purchase 15 of Cayden’s common shares, was attached to each bond. At the date of issuance, the market value of the bonds, without warrants, was 96. The market value of each warrant was $40. Using relative fair value method, what amount should Cayden credit to Bonds payable from the proceeds?

1. $416,000
2. $400,000
3. $399,360
4. $384,000

Answer 1

1)	Amount to be distributed as dividend	$           54,000
	Less:
	Dividend to preferred stock	$             6,000
	for the earlier year (10000 shares *$0.60 per share)
	for this year (10000 shares *$0.60 per share)	$             6,000
	Therefore dividend to common stockholders	$           42,000
	Correct option: D
2)	Bond Issue Price = 400*104%*$1000	$       4,16,000
	Fair market value of bond (400*96%*$1000)	$       3,84,000
	Fair Market Value Of warrant (400*$40)	$           16,000
	Total fair market value	$       3,68,000
	Fair Market value allocated to bond (368000/$400000*$416000	$       3,82,720
	Fair Market Value allocated to warrant (16000/400000*416000)	$           16,640
	the entry would be	Debit	Credit
	Cash	$       4,16,000
	disount on bond	$           17,280
	Paid-up capital		$           16,640
	Bond payable		$       4,00,000
	Correct Option: B