Luis Carrera
ACCT 3322, SECTION 11025
E17-1
1/16/2012
Issuance and Conversion of Bonds
REF Account Debit Credit
1 Cash 19,800,000
Discount on bonds payable 200,000
Bonds payable 20,000,000
Analysis of cash received:
Par value of bonds $ 20,000,000
Sold at $ 0.99
Cash received $ 19,800,000
Unamortized bond issue cost $ 70,000
Cash $ 70,000
2 Cash $ 19,600,000
Discount on bonds payable $ 1,200,000
Bonds payable $ 20,000,000
Paid-in capital-stock warrants $ 800,000
Analysis of value of bonds:
Value of bonds plus warrants $ 20,000,000
Sold at 0.98
FMV of warrants $ 4.00
Number of warrants $ 200,000
FMV per warrant $ 4
Value assigned to bonds $ 800,000
3 Debt conversion expense $ 75,000
Bonds payable $ 10,000,000
Discount on bonds payable $ 55,000
Common stock $ 1,000,000
Additional paid-in capital-common $ 8,945,000
Cash $ 75,000
Analysis of additional paid-in capital:
Par value of bonds $ 10,000,000
Unamortized discount at conversion date $ 55,000
Carrying value of bonds
Par value of common stock $ 1
Number of shares of common stock 1,000,000
Additional paid-in capital-common $ 1,000,000 $ 8,945,000
Luis Carrera
ACCT 3322, SECTION 11025
E17-4
1/16/2012
Conversion of Bonds
REF Account Debti Credit
(a) Cash $ 10,800,000
Bonds payable $ 10,000,000
Premium on bonds payable $ 800,000
(b) Bonds payable 3,000,000
Premium on bonds payable 216,000
Common stock 2,766,000
APIC-common 450,000
Analysis of unamortized premium on bonds payable:
Original premium, January 1, 2000 800,000
Amortization for 2000 (800,000 / 20 years) 40,000
Amortization for 2001 (800,000 / 20 years) 40,000
Percentage of bonds converted 30%
Unamortized premium on conversion 216,000
Analysis of APIC-common:
Number of shares convertible on January 1, 2000
Number of bonds 10,000
Conversion ratio 5 50,000
Stock split on January 1, 2001 2
Number of shares after split 100,000
Percentage of bonds converted 30%
Number of shares issued 30,000
Par value per share $ 15
Total par value 450,000
Less carrying value of bonds 0
APIC-common 450,000
Luis Carrera
ACCT 3322, SECTION 11025
E17-6
1/16/2012
Conversion of Bonds
REF ACCOUNT DEBIT
(a) December 31, 2002
Bond interest expense $ 156,000
Premium on bonds payable $ 4,000
Cash
Analysis of amortization of premium:
Par value of bonds issued 4,000,000
Issued at 102%
Cash received 4,080,000
Less par value 4,000,000
Premium on bonds 80,000
Number of periods (straight-line amortization) 20
Current amortization of premium 4,000
Analysis of cash paid:
Par value of bonds 4,000,000
Interest rate 8%
Annual interest 320,000
Payments per year 2
Current payment 160,000
Analysis of bond interest expense:
Cash paid 160,000
Less: amortization of premium 4,000
Bond interest expense 156,000
(b) January 1, 2003
Bonds payable $ 400,000
Premium on bonds payable $ 6,400
Common stock
APIC-common
Analysis of unamortized premium:
Premium at issue
Amortization:
June 30, 2001 4,000
December 31, 2001 4,000
June 30, 2002 4,000
December 31, 2002 4,000
Unamortized premium at January 1, 2003 64,000
Percentage of bonds converted 10%
Unamortized premium on converted bonds 6,400
Analysis of APIC-common:
Bonds converted
Par value per bond
Number of bonds converted 400
Conversion ratio to shares of stock 8
Number of shares of stock issued 3,200
Par value of stock $ 100
Allocated to common stock 320,000
Carrying value of bonds 406,400
APIC-common
(c) March 31, 2003
Bond interest expense $ 7,800
Premium on bonds payable $ 200
Bonds interest payable
Analysis of amortization of premium:
Premium at issue 80,000
Number of periods 20
Amortization per period (straight-line) 4,000
Number of months since last payment 3/6
Partial period accrual 2,000
Percentage of bonds converted 10%
Amortization of premium for short period 200
Analysis of bond interrest payable:
Par value 4,000,000
Interest rate 8%
Annual interest 320,000
Payments per year 2
Semi-annual payments 160,000
Number of months since last payment 3/6
Partical period accrual 80,000
Percentage of bonds converted 10%
Bond interest payable 8,000
March 31, 2003
Bonds payable $ 400,000
Premium on bonds payable $ 6,200
Common stock
APIC-common
Analysis of unamortized premium on bonds converted:
Unamortized premium as of January 31, 2003 64,000
Short period amortization 2,000
Unamortized premium as of March 31, 2003 62,000
Percentage converted 10%
Unamortized premium on bonds converted 6,200
(d) June 30, 2003
Bond interest expense $ 124,800
Premium on bonds payable $ 3,200
Bond interest payable $ 8,000
Cash
CREDIT
$ 160,000
$ 320,000
$ 86,400
86,400
$ 8,000
$ 320,000
$ 86,200
$ 136,000
Luis Carrera
ACCT 3322, SECTION 11025
E17-8
DATE
Issuance of Bonds with Detachable Warrants
Sands Company
Journal Entry
September 1, 2001
Account Debit Credit
Cash $ 4,220,000
Unamortized bonds issue costs $ 30,000
Bonds payable $ 4,000,000
Premium on bonds payable $ 136,000
APIC-stock warrants $ 24,000
Bond interest expense $ 90,000
Luis Carrera
ACCT 3322, SECTION 11025
E17-11
DATE
Issuance, Exercise and Termination of Stock Options
Date Account Debit Credit
1/1/2002 No entry
12/31/2002 Compensation expense $ 175,000
APIC-stock options $ 175,000
4/1/2003 APIC-stock options $ 35,000
Compensation expense $ 35,000
12/31/2003 Compensation expense $ 175,000
APIC-stock options $ 175,000
3/31/2004 Cash $ 300,000
APIC-stock options $ 210,000
Common stock $ 120,000
APIC-common stock $ 390,000
Luis Carrera
ACCT 3322, SECTION 11025
E17-13
DATE
Stock Appreciation Rights
(a)
Schedule of Compensation Expense Stock Appreciation Rights (150,000 SARs)
Cumulative Compensation
Market Preestablished Compensation Percentage Accrued Ex
Date Price Price Recognizable Accrued To Date 1,998
12/31/1998 $ 14 $ 10 $600,000 25% $ 150,000 $150,000
(150,000)
12/31/1999 $ 8 $ 10 0 50% 0
12/31/2000 $ 20 $ 10 1,500,000 75% $ 1,125,000
225,000
12/31/2001 $ 19 $ 10 1,350,000 100% $ 1,350,000
(b)
DATE ACCOUNT DEBIT CREDIT
Compensation expense $ 225,000
Liability under stock appreciation plan $ 225,000
To record compensation expense for 2001
Liability under stock appreciation plan $ 1,350,000
Cash $ 1,350,000
To record the exercise of all 150,000 SARs
Rights (150,000 SARs)
Expense
1,999 2,000 2,001
(150,000)
$ 1,125,000
$ 225,000
Luis Carrera
ACCT 3322, SECTION 11025
E17-15
1/16/2012
(a) Weighted Average Number of Shares for 2000
Weighted
Description Shares Period Average
12/31/1999 balance 2,000,000 9/12 1,500,000
9/30/00 10% stock dividend 150,000
10/1-12/31/00 2,150,000
Weighted average for 2000
(b) Weighted Average Number of Shares for 2001
Weighted
Description Shares Period Average
12/31/2000 balance
Shares issued for cash 3/31/2001
4/1/01-12/31/01
Weighted average for 2001
(c) Weighted Average Number of Shares for 2001 (restated)
Weighted
Description Shares Period Average
Weighted average before split on 3/31/02 2,000,000 9/12 1,500,000
Retroactive adjustment for split 1,650,000
Restated weighted average for 2001 3,650,000 3/12 912,500
2,412,500
(d) Weighted Average Number of Shares for 2002
Weighted
Description Shares Period Average
12/31/01 balance
Retroactive adjustement for split
4/1/01-12/31/01
Weighted average for 2001
Luis Carrera
ACCT 3322, SECTION 11025
E17-17
1/16/2012
EPS: Simple Capital Structure
Dates Shares Fraction
Event Outstanding Outstanding of Year
Beginning balance Jan. 1 - May 1 200,000 4/12
May 1 - Oct 31 208,000 6/12
Oct. 31 - Dec. 31 194,000 2/12
Weighted average number of shares outstanding
EPS
Income before extraordinary item $ 1.43
Extraordinary item $ 0.20
Net income $ 1.23
Weighted
Shares
66,667
104,000
32,333
203,000
Luis Carrera
ACCT 3322, SECTION 11025
E17-22
1/16/2012
EPS with Convertible Bonds, Various Situations
(a) Diluted Earnings per share:
Revenues
Expenses:
Expenses other than interest and taxes 8,400
Bond interest expense:
Par value of bonds 60,000
Interest rate 8%
Total bond interest expense 4,800
Income before income taxes
Income taxes (40%) 1,920
New income 2,880
(b) Diluted Earnings per share:
Note: bonds were issued on September 1, 2001
none have been converted or redeemed.
Revenues $ 17,500
Expenses:
Other than interest $ 8,400
Bond Interest (60 * $1,000 * .08 * 1/2) $ 2,400
(40 * $1,000 * .08 * 1/2) $ 1,600 $ 12,400
Income Before Taxes $ 5,100
Income Taxes (40%) $ 2,040
Net Income $ 3,060
$ 5,460
4000 $ 1.37
(c) Diluted Earnings per share:
Note: 20 of 60 bonds were actually converted
on July 1, 2001
Revenues 17,500
Expenses:
Other than interest 8,400
Bond interest
60 * $1,000 * 8% * 6/12 2,400
40 * $1,000 * 8% * 6/12 1600
Total bond interest expense 12,400
Income before income taxes 5,100
Income Taxes (40%) 2,040
Net income 3,060
Diluted earnings per shares:
$ 5,460
8,000 $ 0.68
Luis Carrera
ACCT 3322, SECTION 11025
E17-25
1/16/2012
EPS with Convertible Bonds and Preferred Stock
(a) Diluted EPS for 2001
Net income $ 300,000.00
Add: Savings from interest-net of tax $ 72,000.00
Adjusted net income $ 372,000.00
Additional shares:
Face value of bonds $ 2,000,000
Per bond $ 1,000
Number of bonds $ 2,000
Conversion ratio $ 15
Additional shares in dilution $ 30,000
Diluted EPS:
Adjusted net income $ 372,000
Shares issued and outstanding $ 100,000
Additional shares in dilution $ 30,000
Total shares used in calculation $ 130,000
Diluted EPS $ 2.86
(b) Diluted EPS for 2001
Shares Outstanding $ 100,000
Add: Shares assumed to be issued (10,000 * X 5) $ 50,000
Shares outstanding adjusted for dilutive $ 150,000
Diluted EPS:
Net income $ 300,000
Dilutive securities $ 150,000
Diluted EPS $ 2
Luis Carrera
ACCT 3322, SECTION 11025
E17-26
1/16/2012
EPS with Options, Various Situations
(a) Diluted EPS
Shares assumed issued on exercise 1,000
Proceeds:
Number of shares 1,000
Exercise price 6
Proceeds 6,000
Treasury shares:
Market price 20
Number of shares from Treasury 300
Incremental shares 700
Diluted EPS:
Net income $ 50,000
Shares issued and outstanding 10,000
Incremental shares 700
Total dilutive shares 10,700 10,700
Diluted EPS $ 4.67
(b) Diluted EPS
Shares assumed issued on exercise 1,000
Proceeds:
Number of shares 1,000
Exercise price 6
Proceeds 6,000
Treasury shares:
Market price 20
Number of shares from Treasury 300
Incremental shares 700
Number of months in short period 3/12
Incremental shares for short period 175
Diluted EPS:
Net income 50,000
Shares issued and outstanding 10,000
Incremental shares 175
Total dilutive shares 10,175
Diluted EPS 4.91
Luis Carrera
ACCT 3322, SECTION 11025
P17-2
1/16/2012
Entries for Conversion, Amortization, and Interrest of Bonds
(a) August 1, 2002 Conversion
Bonds payable $ 150,000
Discount on bonds payable $ 3,032
Common stock $ 120,000
APIC-Common stock $ 26,968
(b) August 31, 2002 To Accrue Interest
Bond interest expense 255
Discount on bonds payable 255
Bond interest expense 13,500
Interest payable 13,500
(c) December 31, 2002 To Close Interest Expense
Income summary 175,756
Bond interest expense 175,756
Luis Carrera
ACCT 3322, SECTION 11025
P17-3
1/16/2012
Stock Option Plan
1999
No Entry
January 2, 2000
No entry
December 31, 2000
Compensation Expense $ 132,000
Paid-in-Capital-Stock Options $ 132,000
December 31, 2001
Compensation Expense $ 120,000
Paid-in-Capital - Stock Options $ 120,000
Paid- In Capital - Stock Options $ 132,000
Paid in Capital from Expired Stock Options $ 132,000
December 31, 2002
Common Stock (20,000 X $5) $ 160,000
Paid-In Capital in Excess of Par $ 120,000
Common Stock (20,000 X $5) $ 100,000
Paid-In Capital in Excess of Par $ 180,000
Luis Carrera
ACCT 3322, SECTION 11025
P17-7
1/16/2012
EPS Computation of Basic and Diluted EPS
(a) Shares for Basic EPS
Restated Fraction
Event Dates Shares Restatement Shares of Year
Beginning Balance 2,000,000
June 1 - Oct. 1 1.20 2400000 1/3
New Issue 2,500,000
Oct. 1 - May 31 1.20 3000000 2/3
Beginning Balance 3,000,000
June 1 - Dec. 1 1/2
New Issue 3,800,000
Dec. 1 - May 31 1/2
(b) Shares for Diluted EPS
Weighted average basic
Convertible preferred stock:
Preferred stock outstanding:
Number of shares
Split on July 1
5% dividend on January 1
Preferred stock converted:
Number of shares
Split on July 1
5% dividend on January 1
Number of months before conversion
Shares for diluted EPS
(c) Adjusted Net Income
After-tax net income
Preferred stock dividends # Dividend Amounts
March 31
June 30
September 30
December 31
Adjusted net income
Weighted
Average
800,000
2,000,000
2,800,000
1,500,000
1,900,000
3,400,000