Question

Tim Howard Gloves issued 5.00% bonds with a face amount of $36 million, together with 6 million shares of its $1 par common stock, for a combined cash amount of $68 million. The fair value of Howard's stock cannot be determined. The bonds would have sold for $30 million if issued separately. For this transaction, Howard should record paid-in capital—excess of par in the amount of:

Multiple Choice:
$32 million
$26 million
$28 million
$38 million

Answer 1

Howard should record paid-in capital—excess of par in the amount of $26 million.

Step-by-step explanation:

To record paid-in capital—excess of par, we need to calculate the fair value of the stock. Since the fair value of Howard's stock cannot be determined, we'll use the residual method.

First, calculate the fair value of the bonds by subtracting the amount the bonds would have sold for separately ($30 million) from the combined cash amount ($68 million).

This gives us $38 million.

Next, subtract the fair value of the bonds from the combined cash amount to find the fair value of the stock: $68 million - $36 million = $32 million.

Finally, subtract the face amount of the stock from the fair value of the stock to find the paid-in capital—excess of par: $32 million - $6 million = $26 million.

Therefore, Howard should record paid-in capital—excess of par in the amount of $26 million.