Question

During 2014, Gordon Company issued at $104 four hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon's common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at $96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon's stockholders' equity?

Select one:
A. $0
B. $16,000
C. $16,640
D. $15,808

Answer 1

The proceeds from the issuance of bonds with detachable stock warrants attributed to stockholders' equity are the market value of the warrants ($16,000), which is option B.

Step-by-step explanation:

The student is asking how to allocate the proceeds from the issuance of bonds with detachable stock warrants between debt and equity. The Gordon Company issued 400 bonds at $104 each, with a total face value of $1,000 each, and attached one stock warrant to each bond, which had a market value of $40. The market value of the bonds without the warrants was $96. To determine how much of the proceeds should be accounted for as part of the company's stockholders' equity, we first calculate the total market value of the warrants (400 * $40 = $16,000). Since stock warrants directly contribute to equity when they are exercised, this $16,000 is recognized as part of the stockholders' equity.

Therefore, the correct answer to how much of the proceeds should be accounted for as part of Gordon's stockholders' equity is $16,000, which corresponds to option B.