Question

On April 1, 2021, Austere Corporation issued $320,000 of 15% bonds at 106. Each $1,000 bond was sold with 40 detachable stock warrants, each permitting the investor to purchase one share of common stock for $19. On that date, the market value of the common stock was $16 per share and the market value of each warrant was $3. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities

Answer 1

$300,800

Step-by-step explanation:

First Calculate the proceeds from the issuance of the bond

Proceeds from bonds = Face value x Price rate = $320,000 x 106% = $339,200

Now calculate the fair value of the warrant issued

Fair value of warrant = Numbers of shares x Stock per bond x Market value of each Warrant = ( $320,000 / $1,000 ) x 40 x $3 = 320 x 40 x $3 = $38,400

Liability Portion = Procedds from bonds - Fair value of waarants = $339,200 - $38,400 = $300,800