Situation Bowsher Company had 10% bonds payable outstanding with a total face value of $185,000. Each bond had an individual face value of $1,000 and paid interest semiannually on June 30 and December 31. On July 1 of the current year the 10% bonds had a total book value of $210,000. At that time, because of a financial restructuring, the company executed an “exchange agreement” in which all of these 10% bonds were extinguished. In exchange for their 10% bonds, the bondholders were given cash of $125 per 10% bond, six shares of 7%, $100 preferred stock per 10% bond, and 50 warrants per 10% bond allowing the holder to acquire 50 shares of $5 par common stock for $25 per share. On July 1 the 7% preferred stock was selling at $106 per share and the warrants were selling at $5 each on the open market. You are the assistant accountant for Bowsher Company and have been asked by the head accountant to recommend how to record this transaction.
Directions
Research the related generally accepted accounting principles and prepare a short memo that explains and justifies your recommended journal entry to record the transaction. Cite your reference and applicable paragraph numbers.