On January 1, 2011, Garner issued 10-year, $200,000 face value, 6% bonds at par. Each $1,000 bond
Question:
On January 1, 2011, Garner issued 10-year, $200,000 face value, 6% bonds at par. Each $1,000 bond is convertible into 30 shares of Garner $2 par value common stock. The company has had 10,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2012. (Ignore all tax effects.)
Accounting
(a) Prepare the journal entry Garner would have made on January 1, 2011, to record the issuance of the bonds.
(b) Garner’s net income in 2012 was $30,000 and was $27,000 in 2011. Compute basic and diluted earnings per share for Garner for 2012 and 2011.
(c) Assume that 75 percent of the holders of Garner’s convertible bonds convert their bonds to stock on June 30, 2013, when Garner’s stock is trading at $32 per share. Garner pays $50 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.
Analysis
Show how Garner will report income and EPS for 2012 and 2011. Briefly discuss the importance of GAAP for EPS to analysts evaluating companies based on price-earnings ratios. Consider comparisons for a company over time, as well as comparisons between companies at a point in time.
Principles
In order to converge GAAP and IFRS, the FASB is considering whether the equity element of a convertible bond should be reported as equity. Describe how the journal entry you made in part (a) above would differ under IFRS. In terms of the accounting principles discussed in Chapter 2, what does IFRS for convertible debt accomplish that GAAP potentially sacrifices? What does GAAP for convertible debt accomplish that IFRS potentially sacrifices?
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
Step by Step Answer:
Accounting a Under US GAAP proceeds from the issuance of convertible debt are recorded entirely as debt Cash 200000 Bonds Payable 200000 b 2012 2011 Basic EPS Net income a 30000 27000 Outstanding shar...View the full answer
