Question

Splish Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Splish Corp. has issued 16,500 units. Each unit consists of a $825 par, 12% subordinated debenture and 17 shares of $8 par common stock. The units were sold to outside investors for cash at $1,452 per unit. Prior to this sale, the 2-week ask price of common stock was $66 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 Splish’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.

Answer 1

Account Titles Debit Credit 1). Incremental Method Cash $ 23,958,000.00 Bonds Payable $13,612,500.00 2,244,000.00 8,101,500.00 Common Stock Paid in capital in excess of Par (Cash 16,500 $1,452 $23,958,000) (Bonds payable 16,500 $825 $13,612,500) (Common Stock 16,500 $8 17 $2,244,000) (Paid in capital -balancing figure) 2). Proportional method 23,958,000.00 Cash Discount on bonds payable $ 3,460,805.00 Bonds payable $13,612,500.00 2,244,000.00 Common stock Paid in capital in excess of Par $11,562,305.00 Fair value of Common stock (17 * $66) 1,122.00 Fair value of bond 825.00 Aggregate fair value 1,947.00 Allocated to Common Stock ($23958000 1122/1947) $13,806,305.00 Allocated to Bonds ($23958000 825/1947) $10,151,695.00 Discont on bonds-($13,612,500 $10,151,695) $ 3,460,805.00 Paid in capital in excess ( $13,806,305 $2,244,000) $11,562,305.00