On January 1, 2013, Garner issued 10-year, $200,000 face value, 6% bonds at par.

Question

On January 1, 2013, 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 2014. (Ignore all tax effects.)

~~PLEASE ANSWER THE 2 QUESTIONS BELOW COMPLETELY, THANK YOU~~

1 - Show how Garner will report income and EPS for 2014 and 2013. 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.

2 - 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?

Explanation / Answer

a. Journal Entry to record the issuance of bonds in the books of Scutaro Date Account Title and Explanation Debit Credit 1-Jan-13 Cash $200,000                Bonds Payable $200,000 (To record the issuance of the 6% bonds at par. b. Journal entry to record interest expense and compensation expense in 2014. 1-Jan-14 Compensation Expense $18,000             Paid-in Capital—Stock Options $18,000 (To record compensation expense) Interest Expenses $12,000             Interest payable (($200,000 X 6%) $12,000 ((To record Interest Expenses) Interest Payable $12,000          Cash $12,000 (To record payment in cash of interest accrued on bonds ) c. Compute basic and diluted eps for Scutaro for 2014 and 2013. 2014 2013 Net Income(a) $30,000 $27,000 Outstanding Shares (b) 10,000 10,000 Basic EPS = Net income / Outstanding Shares;(a/b) $3.00 $2.70 Diluted EPS Net Income $30,000 $27,000 Add: Interest savings ($200,000 x 6%) $12,000 $12,000 Adjusted Net Income (a) $42,000 $39,000 Outstanding Shares 10,000 10,000 Shares upon conversion ($200,000/$1,000) x 30 6,000 6,000 Total shares for Diluted EPS(b)                 16,000                    16,000 Diluted EPS = Adjusted Net income / Total Shares;(a/b) $2.63 $2.44 d. Journal entry to record the conversion. Date Account Title and Explanation Debit Credit 30-Jun-15 Bond conversion Expenses (150 bonds x $2) $300.00 Bonds Payable ($200,000 x 75%) $150,000        Common Stock (150 bonds x 30 shares x $2) $9,000.00         Paid in capital excess of common stock ($150,000 - $9,000) $141,000.00        Cash $300.00 (To record conversion of 75% Bonds) Total Number of Bonds issued = $150,000/$1000 = 150 bonds

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