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?

a. $0
b. $16,000
c. $16,640
d. $15,808

Answer 1

The amount of the proceeds from the issuance of bonds with stock warrants that should be accounted for as part of Gordon Company's stockholders' equity is $16,000. This amount corresponds to the market value of the detachable warrants at the time of the bonds' issuance.

Step-by-step explanation:

When Gordon Company issued bonds with detachable stock warrants, the proceeds from the issuance must be allocated between the bonds and the warrants based on their fair values. The market value of the bonds without warrants was 96%, and each detachable warrant was valued at $40. To determine the amount to be accounted for as part of stockholders' equity related to the warrants, you would allocate the proceeds between the bonds and the warrants in proportion to their individual fair market values.

The calculation is as follows: The total market value of the bonds without the warrants would be 400 bonds × $1,000 × 96% = $384,000. The total market value of the warrants would be 400 warrants × $40 = $16,000. Since the bonds were issued at 104, the total proceeds from the issuance are 400 × $1,000 × 104% = $416,000.

Therefore, the proper allocation to stockholders' equity for the warrants is $16,000 which is the market value of the warrants. The answer to the student's question is $16,000 (option b).