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Chapter 16: Q9E (page 877)

Question: (Issuance of Bonds with Stock Warrants) On May 1, 2017, Friendly Company issued 2,000 \(1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined.

Instructions

(a) Prepare the entry to record the issuance of the bonds and warrants.

(b) Assume the same facts as part (a), except that the warrants had a fair value of \)30. Prepare the entry to record the issuance of the bonds and warrants.

Short Answer

Expert verified

Answer

  1. Cash is debited by $2,040,000; Discount on bonds payable is debited by $40,000 and Bonds payable is credited by $2,000,000; Paid-in capital- stock warrant is $80,000.
  2. Cash is debited by $2,040,000; Discount on bonds payable is debited by $20,594 and Bonds payable is credited by $2,000,000; Paid-in capital- stock warrant is $60,594.

Step by step solution

01

(a) Journal entry to record issuance

Date

Accounts and Explanations

Debit

Credit

Cash [(2,000*$1,000) *102%]

2,040,000

Discount on bonds payable (2,000,000*2%)

40,000

Bonds payable (2,000*$1,000)

2,000,000

Paid-in capital- stock warrant ($2,040,000- $1,960,000)

80,000

(Being recording insurance of the bond and warrant)

02

(b) Journal entry to record issuance with fair value of warrants

Date

Accounts and Explanations

Debit

Credit

Cash [(2,000*$1,000) *102%]

2,040,000

Discount on bonds payable (2,000,000- $1,979,406)

20,594

Bonds payable

2,000,000

Paid-in capital- stock warrant [($60,000/$2,020,000) *$2,040,000]

60,594

(Being recording insurance of the bond and warrant)

03

Fair market value of bonds and stock warrant-

Fairvalueofbonds=Issuedshares脳Sellingprice=$2,000,000脳98%=$1,960,000Fairvalueofbonds=Issuednoofshares脳Fairvalue=2,000脳$30=$60,000

04

Allocation of cash received to bonds and warrants-


Allocatedtobonds=Cash脳FairvalueofbondsFairvalueofbonds+Fairvalueofstockwarrant=$2,040,000脳$1,960,000$1,960,000+$60,000=$1,979,406Allocatedtowarrent=Cash脳FairvalueofbondsFairvalueofbonds+Fairvalueofstockwarrant=$2,040,000脳$60,000$1,960,000+$60,000=$60,594

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Most popular questions from this chapter

(Conversion of Bonds) Vargo Company has bonds payable outstanding in the amount of \(500,000, and the Premium on Bonds Payable account has a balance of \)7,500. Each \(1,000 bond is convertible into 20 shares of preferred stock of parvalue of \)50 per share. All bonds are converted into preferred stock.

Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share.

(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

16-18 (L04) (EPS: Simple Capital Structure) Flagstad Inc. presented the following data.

Net income \(2,500,000

Preferred stock: 50,000 shares outstanding,

\)100 par, 8% cumulative, not convertible 5,000,000

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2-for-1 stock split, 10/1

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Compute earnings per share.

What is meant by a dilutive security?
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