Question

On March 1, 2014, Ruiz Corporation issued $1,500,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2034. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2014, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2014 as paid-in capital from stock warrants?

a. $55,200
b. $63,900
c. $78,000
d. $75,000

Answer 1

Ruiz Corporation should record $75,000 as paid-in capital from stock warrants, which is the value obtained by subtracting the market value of the bonds without the warrants from the total market value of the bonds with the warrants and then allocating the residual value to the warrants.

Step-by-step explanation:

The question asks about the amount Ruiz Corporation should record as paid-in capital from stock warrants on March 1, 2014. First, we must determine the total market value of the bonds with the warrants attached, which would be $1,500,000 at 104% or $1,560,000. Next, we subtract the value of the bonds without the warrants, which is $1,500,000 at 95% or $1,425,000. The difference of $135,000 represents the value attributed to the warrants. Now, we must allocate this value to the warrants. There are 1,500 bonds issued, with 25 warrants each, totaling 37,500 warrants. If each warrant is worth $2.00 as per their fair value, the total fair value of all the warrants is 37,500 warrants multiplied by $2.00 which equals $75,000. Therefore, $75,000 is the amount that should be recorded as paid-in capital from stock warrants.