Question

E16.9 (LO 2) (Issuance of Bonds with Stock Warrants) On May 1, 2020, 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.

Answer 1

Answer:

Date        Particulars                                         Debit              Credit

1 May 20   Cash                                                  $2,040,000

                (2000000*1.02)

                Discount on bonds payable              $40,000

                (2000000*(1-0.98)

                      Bonds payable                                                    $2,000,000

                      (2000*$1000)

                      Paid in capital-stock warranties                         $80,000

                      (2000000*(20000000*0.98)

b. Fair value of bonds = 2000000*0.98 = 1960000

Fair value of warrants = 2000*30= 60000

Fair value = 2020000

Allocated to bonds = 1960000/2020000*2040000 = 1940594

Allocated to warrants = 6000/2020000*2040000 = 60594

Date        Particulars                                            Debit              Credit

1 May 20   Cash                                              $20,400,000

               (20000000*1.02)

                Discount on bonds payable        $20594

                (20000000-1979406)

                      Bonds payable                                                    $2,000,000

                      Paid in capital-stock warranties                         $60594