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.
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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