Kilmister Corporation owns 5,000 bonds of Lemmy Company. The investment in bonds

Question

Kilmister Corporation owns 5,000 bonds of Lemmy Company. The investment in bonds cost $5,200,000 and is now worth $5,600,000. Kilmister has a balance in its common stock account of S600,000 (360,000 shares with a par value of $10 per share). Kilmister is currently holding 10 shares of common in treasury stock. Kilmister declares a property dividend whereby stockholders will receive 1 bond (of Lemmy Company) for each 100 shares of stock held. 1. How many bonds will be issued in this transaction? 2. Prepare the journal entries necessary at the date of declaration. . Prepare the journal entry necessary when the bonds are distributed to the stockholders.

Explanation / Answer

1.

Number of shares outstanding = Shares issued - Shares in treasury stock = 360,000 - 10,000 = 350,000

One bond is given for 100 shares.

Therefore,

Number of bonds issued = 350,000 shares/100 shares = 3,500

2.

Following journal entries will be prepared on the date of declaration:

3.

Following journal entry will be prepared when the bonds are distributed:

General Journal Debit Credit Investment in Bonds (5,600,000 - 5,200,000) 400000       Gain on Aprreciation of Investment 400000 Retained Earnings 5600000       Property Dividends Payable 5600000

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