Question

On December 1, 2021, Sheridan Company issued 770 of its 9%, $1,000 bonds at 102. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Sheridan's common stock. On December 1, 2021, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be
A. $770000.
B. $785400.
C. $738276
D. $746130.

Answer 1

Solution :

The cash received on the issue of the bond    785,400    $=770 \times 1000 \times 102\%$

The bond market value without warrant           731,500     $=770\times 1000 \times 95\%$

Bond total par value                                            770,000    $=770\times 1000$

The initial carrying value of the bon payable    $ 746,130    $=\frac{731,500 \times 785,400}{770,000}$

  Thus the initial carrying would be = $ 746,130