Reference no: EM132406711

Question

Problem 1. On January 1, 2021, Bishop Company issued 10% bonds dated January 1, 2021, with a face amount of $20 million. The bonds mature in 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2021.

2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2021.

3. Prepare the journal entry to record interest on June 30, 2021, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2021, using the effective interest method.

Problem 2. On January 1, 2020, Slug Corporation issued $6 million of 8%, 10-year convertible bonds at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of $1 par common stock. Fuzz Company purchased 20% of the issue as an investment. On July 1, 2024, Fuzz converted all of its bonds into common stock of Slug. The market price per share for Slug was $32 at the time of the conversion. Both companies use the straight-line method for amortization.

Required:

1. Prepare journal entries for the issuance of the bonds on the issuer and the investor books.

2. Prepare the journal entries for the conversion on the books of the issuer and the investor.

Problem 3. On December 31, 2020, Heffner Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $100 par, cumulative preferred stock outstanding. On February 28, 2021, Heffner purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Heffner sold 6,000 of the treasury shares on September 30, 2021, for $47 per share.

Net income for 2021 was $540,000. The income tax rate is 25%. Also outstanding at December 31, 2020, were fully vested incentive stock options giving key employees the option to buy 50,000 common shares at $40.

The market price of the common shares averaged $50 during 2021. Five thousand 6% bonds were issued at par on January 1, 2021. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds had been converted by December 31, 2021, and no stock options were exercised during the year.

Required:

Compute basic and diluted earnings per share (rounded to 2 decimal places) for Heffner Company for 2021.