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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

Tomba Corporation had 300,000 shares of common stock outstanding on January 1, 2017. On May 1, Tomba issued 30,000 shares. (a) Compute the weighted-average number of shares outstanding if the 30,000 shares were issued for cash. (b) Compute the weighted-average number of shares outstanding if the 30,000 shares were issued in a stock dividend.

(EPS: Simple Capital Structure) On January 1, 2017, Lennon Industries had stock outstanding as follows.

6% Cumulative preferred stock, \(100 par value,

issued and outstanding 10,000 shares \)1,000,000

Common stock, \(10 par value, issued and

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To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 160,000 common shares. The acquisitions took place as shown below.

Date of Acquisition Shares Issued

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Company B July 1, 2017 80,000

Company C October 1, 2017 30,000

On May 14, 2017, Lennon realized a \)90,000 (before taxes) gain on discontinued operations.On December 31, 2017, Lennon recorded income of $300,000 from continuing operations.

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Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

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(c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for

(a) and (b).

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(EPS: Simple Capital Structure) A portion of the combined statement of income and retained earnings of Seminole Inc. for the current year follows.

Income from continuing operations \(15,000,000

Loss from discontinued operations, net of

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Net income 13,660,000

Retained earnings at the beginning of the year 83,250,000

96,910,000

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On preferred stock鈥擻)6.00 per share \( 300,000

On common stock鈥擻)1.75 per share 14,875,000 15,175,000

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At the end of the current year, Seminole Inc. has outstanding 8,500,000 shares of \)10 par common stock and 50,000 shares of 6% preferred. On April 1 of the current year, Seminole Inc. issued 1,000,000 shares of common stock for $32 per share to help finance the loss from discontinued operations.

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February 1 Issued 120,000 shares

March 1 Issued a 10% stock dividend

May 1 Acquired 100,000 shares of treasury stock

June 1 Issued a 3-for-1 stock split

October 1 Reissued 60,000 shares of treasury stock

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