Cullumber Corporation is a regional company which is an SEC
registrant. The corporation’s securities are thinly traded on
NASDAQ. Cullumber Corp. has issued 20,000 units. Each unit consists
of a $1,000 par, 12% subordinated debenture and 20 shares of $10
par common stock. The units were sold to outside investors for cash
at $1,760 per unit. Prior to this sale, the 2-week ask price of
common stock was $80 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
Cullumber’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. |
Solution
No. | Account titles | Debit | Credit |
1. | Cash(1760×20000) | $35,200,000 | |
Bonds payable(1000×20000) | $20,000,000 | ||
Common stock(20000*20*10) | $4,000,000 | ||
Paid in capital in excess of par-Common stock | $11,200,000 | ||
2. | Cash | $35,200,000 | |
Bond Discount(20,000,000- 13,538,461.5) | $6,461,539 | ||
Bonds payable | $20,000,000 | ||
Common stock | $4,000,000 | ||
Paid in capital in excess of par-Common stock(21,661,538.5**- 4000000) | $17,661,539 |
Working note: for part 1
Cash = price received per unit * no of units = (1760×20000) = 35,200,000
bonds payable = face value * no of units = (1000×20000) = 20,000,000
common stock = no of units * 20 shares * price per share = 20000 * 20 * 10 = 4,000,000
Working note: for part 2
Allocated value:
Subordinate debentures = 1000 (as stated in question)
Common stock = no of shares * price per share = 20 * 80 = 1600
Total = common stock + debentures =1000 + 1600 = 2600
Thus ratio = 1000 / 2600 and 1600 / 2600
Amount allocate to bond = value total * ratio of bond = [35,200,000 * 10/26] = 13,538,461.5
allocated to common stock = value total * ratio of stock [35,200,000 *16/26] = 21,661,538.5
Now,
paid in capital excess of common stock = allocated common stock - common stock = 21,661,538.5 - 4,000,000 = 17,661,539
Bond discount = bonds payable - allocated to bond value = (20,000,000- 13,538,461.5) = 6,461,539
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