Final answer:
To record the sale of the bonds with detachable warrants, Kegin Corporation should allocate the proceeds between the bonds payable, premium on bonds payable, and paid-in capital for the stock warrants. Based on the market values given, the correct accounting entry, out of the provided options, is bonds payable of $4,000,000, premium on bonds payable of $70,400, and paid-in capital for stock warrants of $169,600.
Step-by-step explanation:
To determine which accounts Kegin Corporation should credit to record the sale of the bonds, we need to allocate the proceeds of the bond issue between the bonds payable and the warrants. We are given that the market value of an $8% bond without warrants is $1,008 and each warrant has a market value of 21. Knowing that each $1,000 bond has two detachable warrants, we can calculate the value of the warrants included with each bond as $42 (2 warrants × $21). Therefore, the bond value itself can be calculated as $1,008 and the combined value per $1,000 bond is $1,050 ($1,008 + $42). Kegin Corporation sold its bond issue for $4,240,000 which is above the value of the bonds without the warrants ($4,000,000 bond total × $1,008/$1,000), indicating a premium on bonds payable and additional paid-in capital related to the warrants.
Using proportions, we can allocate the proceeds:
$1,008 bond value / $1,050 total value = $4,000,000 / X
$42 warrant value / $1,050 total value = (4,240,000 - X) / 4,240,000
Solving for X gives us the bonds payable portion and the remainder is then assigned to the premium and warrants.
Therefore, out of the given options, the appropriate accounting for Kegin Corporation to record the sale of the bonds is:
Option c. Bonds Payable - $4,000,000 Premium on Bonds Payable - 70,400 Paid-in Capital—Stock Warrants - 169,600