Question

On May 1, 2010, Payne Co. issued $300,000 of 7% bonds at 103, which are due on April 30, 2020. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2010, the fair value of Payne's common stock was $35 per share and of the warrants was $2.

On May 1, 2010, Payne should record the bonds with a
a. discount of $12,000.
b. discount of $3,360.
c. discount of $3,000.
d. premium of $9,000

Answer 1

Payne should record the bonds with a discount of $12,000.

Step-by-step explanation:

On May 1, 2010, Payne Co. issued $300,000 of 7% bonds at 103, which are due on April 30, 2020. The bonds have detachable stock warrants attached to them. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2010, the fair value of Payne's common stock was $35 per share and of the warrants was $2.

To determine the initial recording of the bonds, we need to calculate the value of the detachable stock warrants and compare it to the bonds without the warrants. The value of the detachable stock warrants is found by multiplying the number of warrants (20) by the value per warrant ($2). The value of the detachable stock warrants is $40.

The bonds without the warrants would sell at 96%, so the selling price of the bonds (with warrants) would be 96% of $300,000, which is $288,000.

Therefore, Payne should record the bonds with a discount of $12,000.