Question

Pina Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Pina Corp. has issued 21,500 units. Each unit consists of a $1,075 par, 12% subordinated debenture and 22 shares of $11 par common stock. The units were sold to outside investors for cash at $1,892 per unit. Prior to this sale, the 2-week ask price of common stock was $86 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 Pina’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.

No.	Account Titles and Explanation	Debit	Credit
1.	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
2.	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

Answer 1

Solution-

1) Employing the incremental method -

No	Account Titles and Explanation	Debit ($)	Credit ($)
1.	Cash	40678000
	To Bonds Payable		23112500
	To Common Stock		5203000
	To Paid in capital in excess of par-common stock		12362500

Working-

Lump sum receipt = 21500 units * $1892 per unit

= $40678000

Allocated to bonds = 21500 units * $1075 par

= $23112500

Amount allocated to common stock = $40678000 - $23112500

= $17565500

Common stock = 21500 units * 22 shares * $11

= $5203000

Paid in capital in excess of par-common stock = $40678000 - $23112500 - $5203000

= $12362500

2) Employing the proportional method -

No	Account Titles and Explanation	Debit ($)	Credit ($)
2.	Cash	40678000
	Discount on bonds payable	8374094
	To Bond payable		23112500
	To Common stock		5203000
	To Paid in capital in excess of par-common stock		20736594

Working -

Cash = $40678000

Aggregate fair value = (22 shares * $86) + ($1075 * 1)

= 1892 + 1075

= $2967

Allocated to common stock = (1892/2967) * 40678000

= $25939594

Allocated to bonds = (1075/2967) * 40678000

= $14738406

Discount on bonds payable = ($23112500 - $14738406)

= $8374094

Paid in capital in excess of par-common stock = ($25939594 - $5203000)

= $20736594