Exercise 15-4 Faith Evans Corporation is a regional company which is an SEC regi

Question

Exercise 15-4

Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,470 units. Each unit consists of a $524 par, 12% subordinated debenture and 10 shares of $5 par common stock. The investment banker has retained 419 units as the underwriting fee. The other 10,051 units were sold to outside investors for cash at $921 per unit. Prior to this sale, the 2-week ask price of common stock was $42 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

(a)

Prepare the journal entry to record Evans’ transaction, under the following conditions. (Round answers to 0 decimal places, e.g. $38,487. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.

Account Titles and Explanation

Debit

Credit

(1) Employing the incremental method. (2) Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.

Explanation / Answer

NO ACCOUNT TITLLE DEBIT CREDIT 1 CASH ($921 * 10051) $9256971 UN AMORTIZED BOND ISSUE COST ($385899 * $524/$921) $219556 BONDS PAYBLE $5266724 COMMON STOCK (100510 * $5) $522550 EXCESS PAID IN CAPITAL $3687253 2 CASH (10051 * $921) $9256971 SUBORDINATED DEBENTURE (10051 * $524) $5266724 COMMON STOCK $3990247

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