On January 1, 2016, Scutaro Company issued 10-year, $200,000 face value, 6% bonds at par (payable annually on January 1). Each $1,000 bond is convertible into 30 shares of Scutaro $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 2017.Scutaro also has adopted a stock-option plan that granted options to key executives to purchase 4,000 shares of the company’s common stock. The options were granted on January 2, 2016, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expired 6 years from the date of grant. The option price was set at $4, and the fair value option-pricing model determines the total compensation expense to be $18,000. All of the options were exercised during the year 2018: 3,000 on January 3 when the market price was $6, and 1,000 on May 1 when the market price was $7 a share. (Ignore all tax effects.)Instructions(a) Prepare the journal entry Scutaro would have made on January 1, 2016, to record the issuance of the bonds.(b) Prepare the journal entry to record interest expense and compensation expense in 2017.(c) Scutaro’s net income in 2017 was $30,000 and was $27,000 in 2016. Compute basic and diluted earnings per share for Scutaro for 2017 and 2016. Scutaro’s average stock price was $4.40 in 2016 and $5 in 2017.(d) Assume that 75 percent of the holders of Scutaro’s convertible bonds convert their bonds to stock on June 30, 2018, when Scutaro’s stock is trading at $8 per share. Scutaro pays $2 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.
On January 1, 2016, Scutaro Company issued 10-year, $200,000 face
Scutaro also has adopted a stock-option plan that granted options to key executives to purchase 4,000 shares of the company’s common stock. The options were granted on January 2, 2016, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expired 6 years from the date of grant. The option price was set at $4, and the fair value option-pricing model determines the total compensation expense to be $18,000. All of the options were exercised during the year 2018: 3,000 on January 3 when the market price was $6, and 1,000 on May 1 when the market price was $7 a share. (Ignore all tax effects.)
Instructions
(a) Prepare the
(b) Prepare the journal entry to record interest expense and compensation expense in 2017.
(c) Scutaro’s net income in 2017 was $30,000 and was $27,000 in 2016. Compute basic and diluted earnings per share for Scutaro for 2017 and 2016. Scutaro’s average stock price was $4.40 in 2016 and $5 in 2017.
(d) Assume that 75 percent of the holders of Scutaro’s convertible bonds convert their bonds to stock on June 30, 2018, when Scutaro’s stock is trading at $8 per share. Scutaro pays $2 per bond to induce bondholders to convert.
Prepare the journal entry to record the conversion.
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