Question

Skysong limited issued $36000000 of par value 6% bonds at 99. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $5. Skysong Limited has adopted ASPE.

Option 1: Residual Method
Option 2: Value Equity component at zero.

Answer 1

Skysong Limited issued $36,000,000 of 6% bonds at 99 with one detachable stock purchase warrant for each $100 par value bond. The two options mentioned, Residual Method and Value Equity component at zero, are accounting methods for allocating the proceeds of the bond issuance between the debt and equity components.

Step-by-step explanation:

Skysong Limited issued $36,000,000 of 6% bonds at 99, with one detachable stock purchase warrant issued with each $100 par value bond. At the time of issuance, the warrants were selling for $5. The two options mentioned, Residual Method and Value Equity component at zero, are accounting methods for allocating the proceeds of the bond issuance between the debt and equity components.

The Residual Method allocates the proceeds based on the fair value of the warrants, which is determined by subtracting the fair value of the bonds without the warrants from the total fair value of the bonds issued.

The second option, Value Equity component at zero, treats the warrants as having no value, and allocates the entire proceeds to the bond liability. Which method to adopt depends on the accounting standards followed by Skysong Limited (ASPE in this case) and management's judgment.