Chapter 16 Practice Homework
1. $302,000 is correct. Without fair value information, the book value method of allocating the
bond carrying value to the owners’ equity accounts must be used. The carrying value of the
bond issue is $752,000 ($775,000 – $23,000). Of that amount, $450,000 is first allocated to
the common stock account at par value (90,000 shares issued x $5). The remainder, or
$302,000 ($752,000 – $450,000) is allocated to additional paid in capital.
Bondholders of Balm Co. converted their bonds into 90,000 shares of $5 par value common stock. In
Balm’s accounting records, the bonds had a par value of $775,000 and unamortized discount of
$23,000 at the time of conversion. What amount of additional paid-in capital from the conversion
should Balm record?
$302,000
2. An interest rate that is lower than nonconvertible debt is correct because convertible debt
generally will have an interest rate that is lower than nonconvertible debt.
Which of the following is generally associated with the terms of convertible debt securities?
An interest rate that is lower than nonconvertible debt.
3. $3.79 is correct. Basic EPS = Net Income – Preferred Dividends / Weighted shares
outstanding. The numerator is $236,000 – preferred dividends [($60 x 10,000) x .04 =
24,000] = $212,000. The denominator is 50,000 (12/12) + 8,000 (9/12) = 56,000 shares.
$212,000 / 56,000 = $3.786 or $3.79.
A company had the following outstanding shares as of January 1, year 2:
Preferred stock, $60 par, 4%, cumulative
Common stock, $3 par
12/12
9/12
6/12