Question

On December 1, 2014, Lester Company issued at 103, five hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Lester's common stock. On December 1, 2014, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be

a. $484,100.
b. $489,250.
c. $500,000.
d. $515,000.

Answer 1

Considering the issuance of five hundred 9%, $1,000 bonds at 103 with detachable stock warrants, the initial carrying value of the bonds payable is calculated by subtracting the market value of the warrants from the total proceeds. Although the detailed calculation leads to $490,000, which is not available in the options given, the closest given choice, based on the details provided, would be option b. $489,250.

Step-by-step explanation:

The student's question is concerned with how to account for the initial carrying value of bonds payable when those bonds are issued with detachable stock warrants. To calculate this amount, we separate the proceeds into the amount related to the bonds and the amount related to the warrants. Given that the company issued five hundred 9%, $1,000 bonds at 103, this means that each bond was issued for $1,030 ($1,000 x 103%). So, the total amount received solely for the bonds can be calculated as follows:

500 bonds x $1,030 = $515,000

However, since we know the market value of the bonds without the warrants was 95, we must calculate the value of the bonds based solely on this market rate:

500 bonds x $950 (95% of $1,000) = $475,000

Then, we determine the value of the stock purchase warrants. There are 500 bonds each with one warrant attached, and each warrant has a market value of $50:

500 warrants x $50 = $25,000

Now, to properly split the proceeds between the bonds and the warrants, we take into consideration that the total proceeds from issuing the bonds and warrants was $515,000. The value assignable to the warrants is their market value of $25,000. Therefore, the initial carrying value assignable to the bonds is the total proceeds minus the value of the warrants:

$515,000 (total proceeds) - $25,000 (value of warrants) = $490,000

However, this is not in the given answer choices, so we must consider that there might be an error in the question details, assumptions, or in the calculations offered. Based on the given choices, the closest option to our calculations would likely be option b. $489,250, assuming an error elsewhere.