Question

On January 1, 2016, Skysong Company issued 10-year, $94,000 face value, 6% bonds at par interest payable annually on January 1). Each $900 bond is convertible into 29 shares of Skysong $2 par value common stock. The company has had 9,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2017. Skysong also has adopted a stock-option plan that granted options to key executives to purchase 5,400 shares of the company's common stock. The options were granted on January 2, 2016, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expired 6 years from the date of grant. The option price was set at $5, and the fair value option pricing model determines the total compensation expense to be $24,000. All of the options were exercised during the year 2018: 2,700 on January 3 when the market price was $7, and 900 on May 1 when the market price was $8 a share. (Ignore all tax effects.) Prepare the journal entry Skysong would have made on January 1, 2016, to record the issuance of the bonds. (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 for the amounts.) Account Titles and Explanation Debit Credit

Answer 1

In the books of Skysong
Journal Entries
Date	Description	Debit	Credit
2016
Jan-01	Cash	$           94,000
	Bonds Payable		$              94,000
	(being bonds payable issued at par)
2017
Dec-31	Interest Expense	$              5,640
	Interest Payable on Bonds		$                5,640
	(being 9% interest payable on bonds accrued)
Dec-31	Compensation expense (24000*1/2)	$           12,000
	Paid in capital- Stock option		$              12,000
	(being compensation expense accrued )
2018
Jun-30	Debt Conversion Expense	$              1,410
	Bonds payable	$           70,500
	Common Stock (70500/900*29*2)		$                4,543
	Paid in capital in excess of par		$              65,957
	Cash		$                1,410
	(being bonds converted into equity shares)
Calculation of basic & diluted earnings per share for the year 2017
Basic Earnings per share = Net Income/No. of shares outstanding
	=27000/9000
	=$ 3 per share
Diluted Earnings per share= Net Income/ Weighted average no. of shares
	=27000/13433
	= $ 2.01 per share
Workings-
1 .Assuming bond par value is $ 100
No. of bonds issued =94000/100 = 940 bonds
75% were converted ,i.e 940*75% =705 bonds were converted into equity shares
For every $ 900 bonds 29 shares par value $2 is issued.
Common stock issued= 70500/900*29*2 = $ 4,543
Paid in capital in excess of par =(70500-4543) = $65957
Debt conversion expense = $ 2 per bond
	=705*2
	= 1410
2. Calculation of weighted average no. of shares
	Shares Outstanding	Period covered	Weighted shares
	=9000+2700	1	11700
	=11700+900	8/12	1733
	Weighted shares		13433