Fogelberg Corporation is a regional company, whose securities are thinly traded. Fogelberg has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $5 par ordinary shares. The investment banker has retained 400 units as the underwriting fee. The other 9,600 units were sold to outside investors for cash at $850 per unit. Prior to this sale, the 2-week ask price of ordinary shares was $40 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 Fogelberg’s transaction, under the following conditions.
(1) Employing the incremental method.
(2) Employing the proportional method, assuming the recent price quote on the ordinary shares reflects fair value.
(b) Briefly explain which method is, in your opinion, the better method.