I need help with the analysis portion of this question, please.

Week 1 Group Assignment

On January 1, 2019, 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 2020. (Ignore all tax effects.)

Requirement 1: Accounting

1.Prepare the journal entry Garner would have made on January 1, 2019, to record the issuance of the bonds.

2.Garner's net income in 2020 was $30,000 and was $27,000 in 2019. Compute basic and diluted earnings per share for Garner for 2020 and 2019.

3.Assume that 75% of the holders of Garner's convertible bonds convert their bonds to stock on June 30, 2021, 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.

Requirement 2: Analysis

Show how Garner will report income and EPS for 2020 and 2019. 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.

1.

Journal Entry to record the issuance of

bonds in Scutaro's books

Date

Account Title and explanation

Debit

Credit

1/1/2019

Cash

$200,000.00

Bonds Payable

$200,000.00

2.

Net Income - Preferred Dividends

EPS =

Average number of common stock outstanding

2019

2020

27,000/10,000

30,000/10,000

$2.70

$3.00

Compensation Expense

1/1/2019

Add: Interest Expense

$27,000.00

Adjusted Net Income

$12,000.00

$39,000.00

Common Stock Outstanding

Add: Diluted Shares [(200000/1000)*30]

10,000

Adjusted shares

6,000

16,000

Diluted EPS = Adj. Net Income/Adjusted Shares

39,000/16,000

$2.4375

Compensation Expense

1/1/2020

Add: Interest Expense

$30,000.00

Adjusted Net Income

$12,000.00

$42,000.00

Common Stock Outstanding

Add: Diluted Shares [(200000/1000)*30]

10,000

Adjusted shares

6,000

16,000

Diluted EPS = Adj. Net Income/Adjusted Shares

42,000/16000

$2.6250

3.

Account Title and explanation

Date

Bonds Payable ($200,000 x 75%)

Debit

Credit

6/30/2021

Bond conversion expense (150 bonds $2)

$150,000.00

Common Stock (150 bonds x 30 shares x $2)

$300.00

Paid-in capital in excess of par ($150,000 - $9,000)

$9,000.00

Cash

$141,000.00

$300.00

Total number of bonds issued = $150,000/$1,000 = 150 bonds

Analysis -