Question

Pilsen Company issues 12% bonds with a face value of $10,000 and 600 shares of $10 par common stock in a combined sale, receiving total proceeds of $23,000 on December 31.

Required:
Record the transaction for each independent assumption shown:
1. The common stock has a current market value of $21 per share; the market value of the bonds is not known.
2. The common stock has a current market value of $24.50 per share; the bonds are selling at 98.

Answer 1

1. Date Journal Entry Debit Credit

Dec 31 Cash $23,000

Common stock $6,000

(600*10)

Additional paid in capital $6,600

Common stock ( 600*(21-10))

Bonds payable $10,000

Premium on Bonds payable $400

2. Date Journal Entry Debit Credit

Dec 31 Cash $23,000

Discount on Bonds payable $800

Common stock $6,000

(600*10)

Additional paid in capital $7,800

- Common stock ( 13800-6000)

Bonds payable $10,000

Workings

Market value of common stock =600*24.50 = $14700

Market value of Bonds = 10000*0.98 = $9800

Total Market value = $24500

Allocated to Common stock =23000*14700/24500 = $13800

Allocated to bonds = 23000*9800/24500 = $9200