Exercise 15-4 Sandhill Corporation is a regional company which is an SEC registr

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Exercise 15-4

Sandhill Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Sandhill Corp. has issued 18,500 units. Each unit consists of a $925 par, 12% subordinated debenture and 19 shares of $9 par common stock. The units were sold to outside investors for cash at $1,628 per unit. Prior to this sale, the 2-week ask price of common stock was $74 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. Need some assistance with the red incorrect mark, thank you!

Exercise 15-4 Your answer is partially correct. Try again Sandhill Corporation is a regional company which is an SEC registrant. The corporation's securities are thinly traded on NASDAQ. Sandhill Corp. has issued 18,500 units. Each unit consists of a $925 par, 12% subordinated debenture and 19 shares of $9 par common stock. The units were sold to outside investors for cash at $1,628 per unit. Prior to this sale, the 2-week ask price of common stock was74 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 Sandhill's 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.) (1) Employing the incremental method (2) Employing the proportional method, assuming the recent price quote on the common stock reflects fair value No. Account Titles and Explanation Debit Credit 30,118,000 1. Cash 17,112,500 onds Payabl 3,163,500 842,000 ommon Stock id-in Capital in Excess of Par - Common Stoc 30,118,000 17,112,500 Discount on Bonds Payable 380,278 Bonds Payabl ommon Stock 3,163,500 aid-in Capital in Excess of Par - Common Stoc 10,222,278

Explanation / Answer

2) In proportional method, the issue price of $1,628 will be allocated to bonds and common stock in the ratio of their fair values.

Fair value of bond = $925

Fair Value of Common Stock = 19 shares*$74 = $1,406

Total Fair Value = $925+$1,406 = $2,331

Allocated value to Bond = $1,628*($925/$2,331) = $646 per bond

Allocated to Common Stock = $1,628*($1,406/$2,331) = $982 per unit of 19 shares

Issue Value of Common Stock = 18,500 units*$982 = $18,167,000

Par Value of Common Stock = 18,500 units*19 shares*$9 par = $3,163,500

Paid in capital in excess of par - Common Stock = Issue Value - Par Value

= $18,167,000 - $3,163,500 = $15,003,500

Issue Value of Bonds = 18,500 bonds*$646 = $11,951,000

Par Value of Bonds = 18,500 bonds*$925 par = $17,112,500

Discount on Bonds Payable = Par Value - Issue Value

= $17,112,500 - $11,951,000 = $5,161,500

Journal Entries (Amounts in $)

No. Account Titles and Explanations Debit Credit 2 Cash 30,118,000 Discount on Bonds Payable 5,161,500 Bonds Payable 17,112,500 Common Stock 3,163,500 Paid in capital in excess of par - Common Stock 15,003,500

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