Problem 1: Wesley Company granted compensatory common stock options to its executives on January 1, 2003, the measurement date, for services to be rendered during 2003 and 2004. The quoted market price of Wesley's par value common stock exceeded the option price on January 1, 2003.
The options were exercisable beginning on January 1, 2005, and they lapsed on December 31, 2005. Half of the stock options were exercised in 2005 and half were allowed to lapse.
Required:
a. How should Wesley determine the amount of compensation expense related to the compensatory stock options, if any, that should be recognized in its income statements for 2003, 2004, and 2005? Why?
b. How should Wesley account for the exercise of the stock option? Justify the accounting recommended.
c. How should Wesley account for the lapse of the stock options? Justify the accounting recommended.
Problem 2: For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions.
a. On August 1, 2011, Lane Corporation called its 10% convertible bonds for conversion. The $8,000,000 par bonds were converted into 320,000 shares of $20 par common stock. On August 1, there was $700,000 of unamortized premium applicable to the bonds. The fair market value of the common stock was $20 per share. Ignore all interest payments.
b. Packard, Inc. decides to issue convertible bonds instead of common stock. The company issues 10% convertible bonds, par $3,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94.
c. Gomez Company issues $5,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $4,935,000 and the value of the warrants is $315,000. The bonds with the warrants sold at 101.