Exercise 15-4 Waterway Corporation is a regional company which is an SEC registr

Question

Exercise 15-4 Waterway Corporation is a regional company which is an SEC registrant. The corporation's securities are thinly traded on NASDAQ. Waterway Corp. has issued 13,500 units. Each unit consists of a $675 par, 12% subordinated debenture and 14 shares of $7 par common stock. The units were sold to outside investors for cash at $1 188 per unit Prior t this sale the 2 week as price of common stock was $54 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 Waterway's transaction, under the following conditions. (Round answers to O 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 1. 2. Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

WaterWays Corporation (1) Employing the incremental method. Accounts Titles and Explanations Debit Credit Cash (13500 units x $1188 per unit $16,038,000.00               Bonds Payable (13500 units x $675) $9,112,500.00               Common Stock (13500 units x 14 shares x $7 $1,323,000.00                Paid-in Capital in excess of Par $5,602,500.00 2) Employing the proportional method, assuming the recent price quote on the common stock reflects fair value Cash (13500 units x $1188 per unit $16,038,000.00 Discount on Bonds Payable ($9112500-$16038000 x 675/1431) $1,547,405.66               Bonds Payable (13500 units x $675) $9,112,500.00               Common Stock (13500 units x 14 shares x $7 $1,323,000.00                Paid-in Capital in excess of Par (balancing) $7,149,905.66 Incremental method Lump sum receipt (13,500 X $1188) $16,038,000.00 Less: Allocated to subordinated debenture (13,500 X $675) $9,112,500.00 Balance allocated to common stock $6,925,500.00 Less: Common stock (13,500 X $7 X 14) $1,323,000.00 Paid-in capital in excess of par $5,602,500.00 Proportional Method allocation based on fair value for one unit Subordinated debenture $675.00 Common stock (14 shares X $54) $756.00 Total fair value $1,431.00 Therefore 675/1431 is allocated to the bonds and 756/1431 to the common stock.

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