Question

Exercise 15-04 Riverbed Corporation is a regional company which is an SEC registrant. The corporation's securities are thinly traded on NASDAQ. Riverbed Corp. has issued 13,500 units. Each unit consists of a $675 par, 12% subordinated debenture and 14 shares of $7 par common stock. The units were sold to outside investors for cash at $1,188 per unit. Prior to this sale, the 2-week ask price of common stock was $54 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 Riverbed'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 o 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. No. Account Titles and Explanation Debit Credit 1. 2.

Answer 1

1. Employing the incremental method:

Journal Entry:

Account Titles and Explanation	Debit	Credit
Cash	16,038,000
Bonds Payable		9,112,500
Common Stock (13,500 × $7 × 14 shares)		1,323,000
Paid-in-Capital in Excess of Par - Common Stock		5,602,500

Calculation:

Lump Sum Receipt (1188 * 13500)	16,038,000
Allocated to Bonds (675 * 13500)	9,112,500
Amount Allocated to Common Stock [(1188-675)*13500]	6,925,500

2. Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.

Journal Entry:

Account Titles and Explanation	Debit	Credit
Cash	16,038,000
Discount on Bonds Payable	1,547,406
Bonds Payable		9,112,500
Common Stock		1,323,000
Paid in capital in Excessof Par - Common Stockk		7,149,906

Calculation

Fair Value of Common Stock (14 × $54) =	756
Fair Value of Bonds ($675 × 1) =	675
Aggregate Fair Value	1,431

Allocated to Common Stock [ (756/1431)*16,038,000]	8,472,905.66
Allocated to Bonds [ (675/1431)*16,038,000]	7,565,094.34

Discount on Bonds Payable [9112500-7565094.34]=	1,547,406
Paid in Excess of Par [8472905.66 - (13500*14*7)] =	7,149,906