Question

On July 28, Vent Corp. sold $500,000 of 4%, eight-year subordinated debentures for $450,000. The pur­chasers were issued 2,000 detachable warrants, each of which was for one share of $5 par common stock at $12 per share. Shortly after issuance, the warrants sold at a market price of $10 each. What amount of discount on the debentures should Vent record at issuance?

Answer 1

Answer: Vent should record $70,000

Explanation:

The requirement is to determine the amount of discount on the debentures that Vent should record at issuance.

ASC Topic 470 states that the proceeds from the issuance of debt with detachable stock warrants should be allocated between the bonds and the warrants based upon their relative fair values at the time of issuance.

In this case, the fair value of the bonds is not known, but the fair value of the warrants is $10 per warrant. Thus, the total fair value of the warrants is $20,000 ($10 × 2,000 warrants). The fair value of the debentures can be estimated to be $430,000 ($450,000 total proceeds – $20,000 fair value of warrants). The face value of the bonds $500,000 less the fair value of the bonds of $430,000 equals the bond discount of $70,000.