Answer:
Answers are journal entries, in the explanation box
<h2>
Explanation:</h2><h3><u>
Bonds:</u></h3>
Bonds is an interest bearing security or long term promissory note that a company represents while borrowing money with the interested investors.
<h2><u>
Requirement 1:</u></h2><h2><u>
Prepare the journal entries on August 1, 2021, to record:</u></h2><h3><u>
Requirement 1(a):</u></h3>
The issuance of the bonds by Limbaugh (L)
<u>Solution:</u>
<u>Following is the journal entry for the issuance of bonds on August 1, 2021:</u>
<u>1st August 2021:</u>
Debit: Cash $31,200,000 <u>(Working 1)</u>
Debit: Discount on bonds payable $3,600,000 <u>(Working 3: Note 1)</u>
Credit: Bonds payable $30,000,000
Credit: Equity - stock warrants $4,800,000 <u>(Working 2)</u>
<u>Working 1:</u>
Calculation of cash received:
Cash received = Face value × Issued rate
Cash received = $30,000,000 × 104%
Cash received = $31,200,000
<u></u>
<u>Working 2:</u>
<u>Calculation of amount of equity - stock warrants:</u>
Equity - stock warrants = Market price per warrant × number of warrants × number of bonds
Equity - stock warrants = $8 × 20 warrants × (30,000,000÷ 1,000 bonds)
Equity - stock warrants = $4,800,000
<u>Working 3: </u>
<u>Calculate the discount on bonds payable:</u>
Discount on bonds payable = Bonds payable + Equity stock warrants - Cash received
Discount on bonds payable = $30,000,000 + $4,800,000 - $31,200,000
Discount on bonds payable = $3,600,000
<u>Note 1:</u> Since discount on bonds issues is an expense, therefore, it is debited.
<h3><u>
Requirement: 1 (b)</u></h3>
<u>Prepare the journal entries on August 1, 2021, to record the investment by Interstate (I).</u>
<u></u>
The following is the journal entry on August 1, 2021 to record the investment by Interstate (I) i.e. investor:
Debit: Investment in stock $960,000 (Working 4)
Debit: Investment in bonds $6,000,000 (Working 5)
Credit: Discount on bonds investment $720,000 (Working 7)
Credit: Cash $6,240,000 (Working 6)
<u>Working 4: </u>
<u>Calculate the investment in stock warrants:</u>
Investment in stock warrant = Equity - stock warrant × 20%
Investment in stock warrant = $4,800,000 × 20%
Investment in stock warrant = $960,000
Working 5:
Calculate the amount of investment in bonds:
Investment in bonds = Face value × 20%
Investment in bonds = $30,000,000 × 20%
Investment in bonds = $6,000,000
<u>Working 6:</u>
Calculate the amount of cash paid:
Cash paid = Face value × issued rate × 20%
Cash paid = $30,000,000 × 104% × 20%
Cash paid = $6,240,000
<u>Working 7:</u>
<u>Calculate discount on bond investment:</u>
Discount on bond investment = Investment in stock warrants + Investment in bonds - Cash paid
Discount on bond investment = $960,000 + $6,000,000 - $6,240,000
Discount on bond investment = $720,000
<h2><u>
Requirement 2:</u></h2><h2><u>
Prepare the journal entries for both Limbaugh and Interstate in February 2032, to record the exercise of the warrants.</u></h2>
<h3><u>
Requirement 2(a)</u></h3>
<u>Prepare the journal entries for Limbaugh in February 2032, to record the exercise of the warrants.</u>
Solution:
Following is the journal entry for exercise of warrants by <u>Limbaugh</u>:
Debit: Cash: $7,200,000 (Working 8)
Debit: Equity - stock warrants $960,000 (Working 9)
Credit: Common stock - equity $8,160,000
<u>Working 8: </u>
<u>Amount of cash received from the exercise:</u>
Amount of cash received from the exercise = Exercise price per warrant × Number of warrants × Number of bonds × 20%
Amount of cash received from the exercise = $60 × 20 warrants × ($30,000,000/$1,000) × 20%
Amount of cash received from the exercise = $7,200,000
<u>Working 9:</u>
<u>Amount of equity - stock warrants from exercise:</u>
Equity - stock warrants = Total equity stock-warrants × 20%
Equity - stock warrants = $4,800,000 × 20%
Equity - stock warrants = $960,000
<u>Working 10:</u>
<u>Amount of common stock:</u>
Amount of common stock = Cash received + equity - stock warrants
Amount of common stock = $7,200,000 + $960,000
Amount of common stock = $8,160,000
<h3><u>
Requirement 2(b)</u></h3>
<u>Prepare the journal entries for Interstate in February 2032, to record the exercise of the warrants.</u>
Solution:
The journal entry is as follows:
Debit: Investment in common stock: $8,160,000 (Working 13)
Credit: Investment in stock warrants: $960,000 (Working 11)
Credit: Cash: $7,200,000 (Working 12)
Working 11:
<u>Amount of equity - stock warrants from exercise:</u>
Equity - stock warrants = Total equity stock-warrants × 20%
Equity - stock warrants = $4,800,000 × 20%
Equity - stock warrants = $960,000
<u>Working 12:</u>
<u>Calculate the amount of cash paid for exercise:</u>
Amount of cash paid for the exercise = Exercise price per warrant × Number of warrants × Number of bonds × 20%
Amount of cash paid for the exercise = $60 × 20 warrants × ($30,000,000/$1,000) × 20%
Amount of cash paid for the exercise = $7,200,000
<u>Working 13:</u>
<u>Investment in common stock:</u>
<u>Amount of common stock:</u>
Investment in common stock = Cash paid + Investment in stock warrants
Investment in common stock = $7,200,000 + $960,000
Investment in common stock = $8,160,000
