Question

On May 1, 2020, Flint Company issued 1,500 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined.

a. Prepare the entry to record the issuance of the bonds and warrants

b. Assune the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry to record the issuance of the bonds and warrants.

Answer 1

a. Prepare the entry to record the issuance of the bonds and warrants

Cash received on issuance of 1,500 $1,000 bonds at 102 = $1,500,000

Account Title Debit Credit

Cash ($1,500,000 X 1.02) 1,530,000

Discount on Bonds Payable 30,000

[(1 – .98) X $1,500,000]

Bonds Payable 1,500,000

Paid-in Capital—Stock Warrants 60,000

[$1,530,000 – ($1,500,000 X .98)

b. Assume the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry to record the issuance of the bonds and warrants.

Market value of bonds without warrants $1,470,000

($1,500,000 X .98)

Market value of warrants (1,500 X $30) 45,000

Total market value $1,515,000

Value assigned to bonds = 1,470,000/1,515,000 x $1,530,000 = $1,484,554

Value assigned to warrants = 45,000/1,515,000 X $1,530,000 = 45,446

Account Title Debit Credit

Cash 1,530,000

Discount on Bonds Payable

($1,500,000 – $1,484,554) 15,446

Bonds Payable 1,500,000

Paid-in Capital—Stock Warrants 45,446