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Chapter 16: Q8E (page 876)

(Issuance of Bonds with Detachable Warrants) On September 1, 2017, Sands Company sold at 104 (plus accrued interest) 4,000 of its 9%, 10-year, \(1,000 face value, nonconvertible bonds with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common stock at a specified option price of \)15 per share. Shortly after issuance, the warrants were quoted on the market for \(3 each. No fair value can be determined for the Sands Company bonds. Interest is payable on December 1 and June 1. Bond issue costs of \)30,000 were incurred.

Prepare in general journal format the entry to record the issuance of the bonds

Short Answer

Expert verified

Cash will be debited by $4,220,000, and Unamortized Bond Issue Costs will be credited by $30,000, Bonds Payable will be credited by $4,000,000, Premium on Bonds Payable will be credited by $136,000; Paid-in Capital鈥擲tock Warrants will be credited by $24,000 and Interest Expense will be credited by $90,000.

Step by step solution

01

Journal entry

Date

Transactions

Debit

Credit

September 1, 2017

Cash ($4,160,000 + $90,000 鈭� $30,000)

$4,220,000

Unamortized Bond Issue Costs

$30,000

Bonds Payable (4,000 X $1,000)

4,000,000

Premium on Bonds Payablle

136,000

Paid-in Capital鈥擲tock Warrants

24,000

Interest Expense

90,000

(To record the issuance of the bonds)

02

Calculation of premium on bonds payable

Sales proceeds (4,000 X $1,040)

$4,160,000

Less: Face value of bonds

$4,000,000

Excess of funds over face value

$160,000

Deduct values of stock warrants

鈥�(4,000 X 2 = 8,000; 8,000 X $3)

24,000

Premium on bonds payable

$136,000

03

Calculation of accrued interest

Face value of bonds $4,000,000

$4,000,000

Interest rate

9%

Annual interest ($400,000 x 9%)

$360,000

Accrued interest for 3 months 鈥� ($360,000 X 3/12)

$90,000

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Most popular questions from this chapter

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