Question

Sheridan Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5 ) at $20 (at a time when the stock was selling for $32 ). The price paid for 800,$1000 bonds with the warrants attached was $822000. The market price of the Sheridan bonds without the warrants was $720000, and the market price of the warrants without the bonds was $84600. What amount should be allocated to the warrants? A. $104600 B. $84600 C. $100600 D. $86430

Answer 1

The amount that should be allocated to the warrants is found using the proportional method based on the market prices of the bonds without the warrants and the warrants alone. After calculation, the amount is determined to be $86,430.

The correct option is D.

Step-by-step explanation:

To determine the amount that should be allocated to the warrants when accounting for the purchase of bonds, we can use the proportional method based on the market prices of the separate components: the price of the bonds without the warrants and the price of the warrants alone.

Before we allocate the costs, we know the following market prices: the bonds without warrants are valued at $720,000 and the warrants alone are valued at $84,600. The total price for the bonds with warrants attached is $822,000. The calculation goes as follows:

1. Calculate the total market value of the bonds with the warrants: $720,000 (bonds) + $84,600 (warrants) = $804,600.
2. Calculate the proportion of the total cost that should be allocated to the warrants: ($84,600 / $804,600) × $822,000 = $86,430.

So, the amount that should be allocated to the warrants is $86,430, which corresponds to option D.