chapter 16 intermediate 2

An executive pays no taxes at the time of exercise in a(an)

incentive stock option plan.

For stock appreciation rights, the measurement date for computing compensation is the date

of exercise

A company estimates the fair value of SARs, using an option-pricing model, for

share-based liability awards

Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2018, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,000,000. In applying the book value method, what amount should Morgan credit to the account "paid-in capital in excess of par," as a result of this conversion?

$ 330,000

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion. 46. If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2017?

$141,000.

On January 1, 2017, Sharp Corp. granted an employee an option to purchase 15,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $350,000. The option became exercisable on December 31, 2018, after the employee completed two years of service. The market prices of Sharp's stock were as follows: January 1, 2017 $30 December 31, 2018 50 For 2018, should recognize compensation expense under the fair value method of

$350,000 ÷ 2 = $175,000.

On January 1, 2017, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current market prices of the stock are as follows: January 1, 2017 $35 per share December 31, 2017 38 per share December 31, 2018 30 per share December 31, 2019 33 per share Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2017. *76. What amount of compensation expense should Korsak recognize for the year ended December 31, 2018?

($30 - $20) × 120,000 × .5 = $600,000 $600,000 - $540,000 = $60,000

On January 1, 2017, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current market prices of the stock are as follows: January 1, 2017 $35 per share December 31, 2017 38 per share December 31, 2018 30 per share December 31, 2019 33 per share Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2017. *77. On December 31, 2019, 25,000 SARs are exercised by executives. What amount of compensation expense should Korsak recognize for the year ended December 31, 2019?

($33 - $20) × 120,000 × .75 = $1,170,000 $1,170,000 - $600,000 = $570,000.

On January 2, 2018, for past services, Rosen Corp. granted Nenn Pine, its president, 30,000 stock appreciation rights that are exercisable immediately and expire on January 2, 2019. On exercise, Nenn is entitled to receive cash for the excess of the market price of the stock on the exercise date over the market price on the grant date. Nenn did not exercise any of the rights during 2018. The market price of Rosen's stock was $30 on January 2, 2018, and $45 on December 31, 2018. As a result of the stock appreciation rights, Rosen should recognize compensation expense for 2018 of

($45 - $30) × 30,000 = $450,000.

Norton Company issues 4,000 shares of its $5 par value common stock having a market value of $25 per share and 6,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $192,000. What amount of the proceeds should be allocated to the preferred stock?

(4,000 × $25) + (6,000 × $20) = $220,000 ($120,000 ÷ $220,000) × $192,000 = $104,727.

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion. 47. What should be the amount of the unamortized bond discount on April 1, 2018 relating to the bonds converted?

. $43,200.

Fogel Co. has $4,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2018, the holders of $1,280,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $280,000. Fogel should record, as a result of this conversion, a

. credit of $217,600 to Paid-in Capital in Excess of Par

Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $210,000. What amount of the proceeds should be allocated to the preferred stock?

4,000 X $25) + (6,000 X $20) = $220,000 ($120,000 ÷ $220,000) X $210,000 = $114,545

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

Above 9%

On April 7, 2018, Kegin Corporation sold a $6,000,000, twenty-year, 8 percent bond issue for $6,360,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation's common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation's securities had the following market values: 8% bond without warrants $1,008 Warrants 21 Common stock 28 What accounts should Kegin credit to record the sale of the bonds?

Bonds Payable $6,000,000 Premium on Bonds Payable 105,600

On July 1, 2018, Chen Company issued for $9,450,000 a total of 90,000 shares of $100 par value, 7% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Chen $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $9,225,000. The market price of the rights on July 1, 2018, was $2.50 per right. On October 31, 2018, when the market price of the common stock was $19 per share and the market value of the rights was $3.00 per right, 36,000 rights were exercised. As a result of the exercise of the 36,000 rights and the issuance of the related common stock, what journal entry would Chen make?

Cash................................................................................... 540,000 Paid-in Capital—Stock Warrants ........................................ 90,000 Common Stock ....................................................... 360,000 Paid-in Capital in Excess of Par—Common Stock... 270,000

Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as

Conceptual.

On January 2, 2018, Farr Co. issued 10-year convertible bonds at 105. During 2018, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr's common stock was 50 percent above its par value. On January 2, 2018, cash proceeds from the issuance of the convertible bonds should be reported as

Conceptual.

On July 1, 2018, an interest payment date, $150,000 of Parks Co. bonds were converted into 3,000 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $6,000 unamortized discount on the bonds. Using the book value method, Parks would record

a $9,000 increase in paid-in capital in excess of par.