Question

Zurg, Inc. is an SEC registrant, and its securities are thinly traded on NASDAQ (National Association...

Zurg, Inc. is an SEC registrant, and its securities are thinly traded on NASDAQ (National Association of Securities Dealers Quotes). Zurg, Inc. issued 10,000 units. Each unit consists of a $1,000 par, 16% subordinated debenture and 5 shares of $5 par common stock. The investment banker has retained 500 units as the underwriting fee. The other 9,500 units were sold to outside investors for cash at $1,150 per unit. Prior to this sale the 2-week ask price of common stock was $25 per share. Sixteen percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.
Instructions:
(a) Prepare the journal entry to record the previous transaction, under the following conditions. (1) Employing the incremental method.
(2) Employing the proportional method, assuming the recent price quotes on the common stock reflect fair value.

Homework Answers

Answer #1

PART-1

Particulars

Debit

Credit

Bond Issue Costs ($575,000 * $1,000/$1,150)

500,000

Cash

10,925,000

Bonds Payable

10,000,000

Common Stock (10,000 * 5 * $5)

250,000

Paid-in Capital in Excess of Par

1,175,000

PART-2

Particulars

Debit

Credit

Bond Issue Costs ($575,000 * (1,000/1,125))

511,111

Cash

10,925,000

Bonds Payable

10,000,000

Common Stock (10,000 * 5 * $5)

250,000

Bond Premium ($11,500,000 * (1,000/1,125) - 10,000,000)

222,222

Paid-in Capital in Excess of Par (1,277,778 - 250,000 - 63,889)

963,889

11,500,000 * (125/1,125) = 1,277,778; $575,000 * (125/1,125) = 63,889

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