Question

Flounder Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Flounder Corp. has issued 12,000 units. Each unit consists of a $600 par, 12% subordinated debenture and 12 shares of $6 par common stock. The units were sold to outside investors for cash at $1,056 per unit. Prior to this sale, the 2-week ask price of common stock was $48 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 Flounder’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.

Answer 1

1	Requirement
	In incremental method the proceeds are allocated to securities first.
	Remaining proceeds are allocated to securities with unknown values.Hence
	the proceeds will be allocated to fair value of debentures first and then remaining will be
	allocated to shares
a	Total Proceeds	12000 units *1056/unit	$12,672,000
b	Proceeds allocated for debentures	12000 units *600/unit	$7,200,000
c	Proceeds allocated to shares		$5,472,000
	(a-b)
		Journal Entries
Date	Particulars	Dr Amount	Cr Amount
	cash A/C	$7,200,000
	To 12% Subordinated Debentures		$7,200,000
	being the issue of dentures
	cash A/C	$5,472,000
	To Common Stock
	(12000*12*$6)		$864,000
	To Additional Paid in capital in		$4,608,000
	excess of par value
	issue of 12000 units containing 12 shares
	of $6 each
2	Requirement
	In the proportional method proceeds will be allocated to all the securities and value of the
	securities are known
	Allocation to Security	Fair Market value of security/Total of Lump Sum Sale
a	Total Proceeds	12000 units *$1056/unit	$12,672,000
b	Fair Value of Debentures	12000 units *$600/unit	$7,200,000
c	Fair Value of shares	12000 units *12*$48	$6,912,000
d	Proceeds allocated to debentures
	(a*b/b+c)		$6,465,306
e	Proceeds allocated to shares		$6,206,694
	(a*c/b+c)
		Journal Entries
Date	Particulars	Dr Amount	Cr Amount
	cash A/C	$6,465,306
	12% Subordinated Debentures		$7,200,000
	Disc on issue of Debentures	$734,694
	being the issue of debentures
	cash A/C	$6,206,694
	To Common Stock 12000*12*6		$864,000
	To Additional Paid in Capital in		$5,342,694
	excess of par value
	issue of 12000 units containing 12 shares
	of $6 each