Exercise 15 Riverbed Corporation is a regional company which is an SEC registran

Question

Exercise 15 Riverbed Corporation is a regional company which is an SEC registrant. The corporation's securities are thinly traded on NASDAQ. Riverbed Corp. has issued 20,000 units. Each unit consists of a $1,000 par, 12% subordinated debenture and 20 shares of $10 par common stock. The units were sold to outside investors for cash at $1,760 per unit. Prior to this sale, the 2-week ask price of common stock was 80 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 Riverbed'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 O 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 1. 2. Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

1) Incremental Method

Journal Entries (Amount in $)

Working Note:-

Amount allocated to paid in capital in excess of par-Common stock is the balancing figure which is calculated as follows:-

Paid in capital in excess of par-Common stock = Cash received - Bonds - Common Stock

= $35,200,000 - $20,000,000 - $4,000,000 = $11,200,000

2) Proportional method

Fair value of Bond in one unit = $1,000 (equal to par value)

Fair value of 20 shares in one unit = 20 shares*$80 = $1,600

Total Fair value = $1,000+$1,600 = $2,600

Proportional ratio is $1,000/$2,600 and $1,600/$2,600 for Bond and common stock respectively. (i.e. 10/26 and 16/26).

Cash received = 20,000 units*$1,760 = $35,200,000

Allocated to Bonds = $35,200,000*(10/26) = $13,538,462

Allocated to Common stock = $35,200,000*(16/26) = $21,661,538

Issue price per bond = Value Allocated to bonds/No. of bonds

= $13,538,462/20,000 = $677

Bond Discount per bond = Par value of bond - Issue price

= $1,000 - $677 = $323

Issue price per common share = $21,661,538/(20,000 units*20 shares)

= $21,661,538/400,000 = $54 per share

Paid in capital in excess of par - Common stock = $54 - $10 = $44 per share

Journal Entries (Amount in $)

No. Account Titles and Explanation Debit Credit 1) Cash (20,000 units*$1,760 per unit) 35,200,000 Bonds payable (20,000 units*$1,000) 20,000,000 Common Stock (20,000 units*20 shares*$10 par) 4,000,000 Paid in capital in excess of par-Common Stock 11,200,000

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