Chapter 16 Homework Solutions

BE16-1 Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash.
If the bonds had not

included the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance
of the bonds.
BE16-2 Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of $10
par value common stock. The bonds are converted on December 31, 2014, when the unamortized discount
is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book value
approach.
BE16-3 Pechstein Corporation issued 2,000 shares of $10 par value common stock upon conversion of
1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share.
The common stock is trading at $26 per share at the time of conversion. Record the conversion of the
preferred stock.
BE16-4 Eisler Corporation issued 2,000 $1,000 bonds at 101. Each bond was issued with one detachable
stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market
price of $40. Use the proportional method to record the issuance of the bonds and warrants.
BE16-5 McIntyre Corporation issued 2,000 $1,000 bonds at 101. Each bond was issued with one detachable
stock warrant. After issuance, the bonds were selling separately at 98. The market price of the warrants
without the bonds cannot be determined. Use the incremental method to record the issuance of the bonds
and warrants.
BE16-6 On January 1, 2014, Barwood Corporation granted 5,000 options to executives. Each option entitles
the holder to purchase one share of Barwoods $5 par value common stock at $50 per share at any time
during the next 5 years. The market price of the stock is $65 per share on the date of grant. The fair value
of the options at the grant date is $150,000. The period of benefit is 2 years. Prepare Barwoods journal
entries for January 1, 2014, and December 31, 2014 and 2015.
BE16-7 Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that
instead of options, Barwood granted 2,000 shares of restricted stock.
BE16-8 On January 1, 2014 (the date of grant), Lutz Corporation issues 2,000 shares of restricted stock to its
executives. The fair value of these shares is $75,000, and their par value is $10,000. The stock is forfeited if
the executives do not complete 3 years of employment with the company. Prepare the journal entry (if any)
on January 1, 2014, and on December 31, 2014, assuming the service period is 3 years.
BRIEF EXERCISE 16-1
Cash...............................................................................
Discount on Bonds Payable........................................
Bonds Payable.................................................... . .
3,960,000
40,000
4,000,000
BRIEF EXERCISE 16-2

Bonds Payable..............................................................
Discount on Bonds Payable.................................
Common Stock (2,000 X 50 X $10).......................
Paid-in Capital in Excess of Par
Common Stock...................................................
2,000,000
30,000
1,000,000
970,000
BRIEF EXERCISE 16-3

Preferred Stock (1,000 X $50)......................................
Preferred Stock ($60 $50) X 1,000........................
Common Stock (2,000 X $10)...............................
50,000
10,000
Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only)
20,000
16-1
Paid-in Capital in Excess of ParCommon

Stock ($60 X 1,000) (2,000 X $10)...................
40,000
BRIEF EXERCISE 16-4

Cash...............................................................................
Discount on Bonds Payable
($2,000,000 $1,940,784)..........................................
Bonds Payable.......................................................
Paid-in CapitalStock Warrants.........................
2,020,000
59,216
2,000,000
79,216
Fair value of bonds (2,000 X $1,000 X .98)..................

Fair value of warrants (2,000 X $40)............................
Aggregate fair value.....................................................
$1,960,000
80,000
$2,040,000
Allocated to bonds [($1,960/$2,040) X $2,020,000]....

Allocated to warrants [($80/$2,040) X $2,020,000].....
$1,940,784
79,216
$2,020,000
16-2
Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e, Solutions Manual(For Instructor Use Only)
BRIEF EXERCISE 16-5

Cash................................................................................. 2,020,000
Discount on Bonds Payable
[$2,000,000 X (1 .98)]...............................................
40,000
Bonds Payable........................................................
2,000,000
Paid-in CapitalStock Warrants...........................
60,000*
*$2,000,000 X (1.01 .98)
BRIEF EXERCISE 16-6
1/1/14
No entry
12/31/14
Compensation Expense..............................
Paid-in CapitalStock
Options.............................................
75,000
Paid-in CapitalStock
Options.............................................
75,000
12/31/15
75,000
75,000
BRIEF EXERCISE 16-7

1/1/14
Unearned Compensation............................
Common Stock (2,000 X $5)................
Paid in Capital in Excess of Par
Common Stock
[($65 $5) X 2,000]............................
130,000
12/31/14
Unearned Compensation....................
65,000
12/31/15
Unearned Compensation....................
65,000
10,000
120,000
65,000
65,000
16-3
BRIEF EXERCISE 16-8

1/1/14
12/31/14
Unearned Compensation..............................
Common Stock...........................................
Common Stock.......................................
75,000
Compensation Expense................................
Unearned Compensation ($75,000 3)....
25,000
10,000
65,000
25,000
EXERCISE 16-1 (1520 minutes)

E16-1 (Issuance and Conversion of Bonds) For each of the unrelated transactions described below,
present
the entry(ies) required to record each transaction.
1. Grand Corp. issued $20,000,000 par value 10% convertible bonds at 99. If the bonds had not been
convertible, the companys investment banker estimates they would have been sold at 95. Expenses
of issuing the bonds were $70,000.
2. Hoosier Company issued $20,000,000 par value 10% bonds at 98. One detachable stock purchase
warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling
for $4.
3. Suppose Sepracor, Inc. called its convertible debt in 2014. Assume the following related to the transaction.
The 11%, $10,000,000 par value bonds were converted into 1,000,000 shares of $1 par value
common stock on July 1, 2014. On July 1, there was $55,000 of unamortized discount applicable to
the bonds, and the company paid an additional $75,000 to the bondholders to induce conversion of
all the bonds. The company records the conversion using the book value method.
1.
2.
Cash ($20,000,000 X .99)................................

Discount on Bonds Payable..........................
Bonds Payable.........................................
19,800,000
200,000
Unamortized Bond Issue Costs....................

Cash..........................................................
70,000
Cash.................................................................
Bonds Payable.........................................
Paid-in CapitalStock Warrants............
19,600,000
1,200,000
Value of bonds
plus warrants
($20,000,000 X .98)
Less: Value of warrants
(200,000 X $4)
Value of bonds
16-4
20,000,000
70,000
20,000,000
800,000
$19,600,000
800,000
$18,800,000
3.
Debt Conversion Expense.............................

Bonds Payable................................................
Discount on Bonds Payable...................
Common Stock........................................
Paid-in Capital in Excess of Par.............
Cash..........................................................
75,000
10,000,000
55,000
1,000,000
8,945,000*
75,000
*[($10,000,000 $55,000) $1,000,000]
16-5
E16-2 (Conversion of Bonds) Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1,
2014, at 98 plus accrued interest. The bonds were dated April 1, 2014, with interest payable April 1 and
October 1. Bond discount is amortized semiannually on a straight-line basis.
On April 1, 2015, $1,500,000 of these bonds were converted into 30,000 shares of $20 par value common
stock. Accrued interest was paid in cash at the time of conversion.
Instructions
(a) Prepare the entry to record the interest expense at October 1, 2014. Assume that accrued interest
payable was credited when the bonds were issued. (Round to nearest dollar.)
(b) Prepare the entry(ies) to record the conversion on April 1, 2015. (Book value method is used.)
Assume that the entry to record amortization of the bond discount and interest payment has been
made.
(a) Interest Payable ($200,000 X 2/6)..................

Interest Expense ($200,000 X 4/6) + $2,712..
Discount on Bonds Payable...................
Cash ($4,000,000 X 10% 2)...................
66,667
136,045
2,712
200,000
Calculations:
Par value
Issuance price
Total discount
Months remaining
Discount per month
($80,000 118)
Discount amortized
(4 X $678)
$4,000,000
3,920,000
$ 80,000
118
$678
$2,712
(b) Bonds Payable......................................................

Common Stock (30,000 X $20)......................
Paid-in Capital in Excess of Par....................
1,500,000
27,458
600,000
872,542*
*($1,500,000 $27,458) $600,000

Calculations:
Discount related to 3/8 of
the bonds ($80,000 X 3/8)
Less: Discount amortized
[($30,000 118) X 10]
Unamortized bond discount
$30,000
2,542
$27,458

E16-3 (Conversion of Bonds) Vargo Company has bonds payable outstanding in the amount of $500,000,
16-6
and the Premium on Bonds Payable account has a balance of $7,500. Each $1,000 bond is convertible into
20 shares of preferred stock of par value of $50 per share. All bonds are converted into preferred stock.
Instructions
Assuming that the book value method was used, what entry would be made?
Conversion recorded at book value of the bonds:
Bonds Payable..............................................................
Premium on Bonds Payable........................................
Preferred Stock (500 X 20 X $50).........................
(Preferred Stock)..............................................
500,000
7,500
500,000
7,500
16-7
E16-8 (Issuance of Bonds with Detachable Warrants) On September 1, 2014, Sands Company sold at
104
(plus accrued interest) 4,000 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with detachable
stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common
stock at a specified option price of $15 per share. Shortly after issuance, the warrants were quoted on the
market for $3 each. No fair value can be determined for the Sands Company bonds. Interest is payable on
December 1 and June 1. Bond issue costs of $30,000 were incurred.
Instructions
Prepare in general journal format the entry to record the issuance of the bonds.
SANDS COMPANY
Journal Entry
September 1, 2014
Cash...........................................................................
Unamortized Bond Issue Costs...............................
Bonds Payable (4,000 X $1,000).......................
Premium on Bonds PayableSchedule 1.......
Paid-in CapitalStock Warrants
Schedule 1.........................................................
Bond Interest ExpenseSchedule 2...............
(To record the issuance of the bonds)
4,220,000
30,000
4,000,000
136,000
24,000
90,000
Schedule 1
Premium on Bonds Payable and Value of Stock Warrants
Sales price (4,000 X $1,040)
Less: Face value of bonds
Deduct value assigned to stock warrants
(4,000 X 2 = 8,000; 8,000 X $3)
Premium on bonds payable
$4,160,000
4,000,000
160,000
24,000
$ 136,000
Schedule 2
Accrued Bond Interest to Date of Sale
Face value of bonds
Interest rate
Annual interest
$4,000,000
X
9%
$ 360,000
Accrued interest for 3 months ($360,000 X 3/12)
16-8
90,000
E16-9 (Issuance of Bonds with Stock Warrants) On May 1, 2014, Friendly Company issued 2,000 $1,000
bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds
were selling at 98, but the fair value of the warrants cannot be determined.
Instructions
(a) Prepare the entry to record the issuance of the bonds and warrants.
(b) Assume the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry
to record the issuance of the bonds and warrants.
(a) Cash ($2,000,000 X 1.02)............................

Discount on Bonds Payable......................
[(1 .98) X $2,000,000]
Bonds Payable.......................................
Paid-in CapitalStock Warrants.........
2,040,000
40,000
2,000,000
80,000*
*$2,040,000 ($2,000,000 X .98)

(b) Market value of bonds without warrants
($2,000,000 X .98)
Market value of warrants (2,000 X $30)
Total market value
$1,960,000
$2,020,000
X $2,040,000 = $1,979,406
$60,000
X $2,040,000 = $ 60,594
$2,020,000
$2,040,000
$1,960,000
60,000
$2,020,000
Value assigned to bonds
Value assigned to warrants

Total
Cash..........................................................................
Discount on Bonds Payable...................................
Bonds Payable....................................................
Paid-in CapitalStock Warrants.......................
2,040,000
20,594
2,000,000
60,594
16-9
E16-12 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2013, Nichols Corporation
granted 10,000 options to key executives. Each option allows the executive to purchase one share of
Nichols $5 par value common stock at a price of $20 per share. The options were exercisable within a
2-year period beginning January 1, 2015, if the grantee is still employed by the company at the time of the
exercise. On the grant date, Nichols stock was trading at $25 per share, and a fair value option-pricing
model determines total compensation to be $400,000.
On May 1, 2015, 8,000 options were exercised when the market price of Nichols stock was $30
per share. The remaining options lapsed in 2017 because executives decided not to exercise their
options.
Instructions
Prepare the necessary journal entries related to the stock option plan for the years 2013 through
2017.
1/1/13
No entry
12/31/13
Compensation Expense...............................
Paid-in CapitalStock Options...........
($400,000 X 1/2)
200,000
12/31/14
Compensation Expense...............................
Paid-in CapitalStock Options...........
200,000
5/1/15
Cash (8,000 X $20)........................................

Paid-in CapitalStock Options..................
Common Stock (8,000 X $5).................
Paid-in Capital in Excess of
ParCommon Stock........................
160,000
320,000*
200,000
200,000
40,000
440,000
*($400,000 X 8,000/10,000)
1/1/17
Paid-in CapitalStock Options..................

Paid-in CapitalExpired Stock
Options ($400,000 $320,000).........
80,000
80,000
E16-13 (Accounting for Restricted Stock) Derrick Company issues 4,000 shares of restricted stock
to its CFO, Dane Yaping, on January 1, 2014. The stock has a fair value of $120,000 on this date. The
service period related to this restricted stock is 4 years. Vesting occurs if Yaping stays with the
company for 4 years. The par value of the stock is $5. At December 31, 2015, the fair value of the stock
is $145,000.
Instructions
(a) Prepare the journal entries to record the restricted stock on January 1, 2014 (the date of grant), and
December 31, 2015.
(b) On March 4, 2016, Yaping leaves the company. Prepare the journal entry (if any) to account for this
forfeiture.
(a) 1/1/14
16-10
Unearned Compensation................................ 120,000
100,000
Common Stock (4,000 X $5).....................

Paid-in Capital Excess of Par
Common stock.......................................
12/31/15 Compensation Expense..................................

Unearned Compensation ($120,000 4). . .
(b) 3/4/16
20,000
30,000
Common Stock................................................
20,000
Paid-in Capital Excess of Par......................... 100,000
Unearned Compensation.........................
Compensation Expense (2 X $30,000)....
30,000
60,000
60,000
16-11

Chapter 16 Homework Solutions

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Chapter 16 Homework Solutions

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BE16-1 Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash.

If the bonds had not

BRIEF EXERCISE 16-1

BRIEF EXERCISE 16-2

BRIEF EXERCISE 16-3

Paid-in Capital in Excess of ParCommon

BRIEF EXERCISE 16-4

Fair value of bonds (2,000 X $1,000 X .98)..................

Allocated to bonds [($1,960/$2,040) X $2,020,000]....

BRIEF EXERCISE 16-5

BRIEF EXERCISE 16-7

BRIEF EXERCISE 16-8

EXERCISE 16-1 (1520 minutes)

Cash ($20,000,000 X .99)................................

Unamortized Bond Issue Costs....................

Debt Conversion Expense.............................

*[($10,000,000 $55,000) $1,000,000]

EXERCISE 16-2 (1520 minutes)

(a) Interest Payable ($200,000 X 2/6)..................

(b) Bonds Payable......................................................

*($1,500,000 $27,458) $600,000

EXERCISE 16-3 (1020 minutes)

Conversion recorded at book value of the bonds:

EXERCISE 16-8 (1015 minutes)

Accrued interest for 3 months ($360,000 X 3/12)

EXERCISE 16-9 (1015 minutes)

(a) Cash ($2,000,000 X 1.02)............................

*$2,040,000 ($2,000,000 X .98)

Value assigned to bonds

Value assigned to warrants

EXERCISE 16-12 (1525 minutes)

Cash (8,000 X $20)........................................

Paid-in CapitalStock Options..................

EXERCISE 16-13 (1015 minutes)

Unearned Compensation................................ 120,000

Common Stock (4,000 X $5).....................

12/31/15 Compensation Expense..................................

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