Question

Assume that Jar-Jar Company receives $10 million on issuance of bonds with warrants (10,000 bonds with a face value of $1,000 each). The fair value of the Jar-Jar Company warrants is $300,000, but the company cannot determine the fair value of the bonds without the warrants. What will be the credit to Bonds Payable

Answer 1

$10,000,000

Step-by-step explanation:

Bond with warrants are recorded as the fair value of the warrant as equity and residual amount from the bonds issuance proceeds as liability.

If the company cannot determine the fair value of the bond without warrants, so issuance of bond proceed will go to the bond payable account. Proceed from the Bond issuance will become the liability for the company and there will be no equity value associated with this bond.

In this question the fair value of the bond cannot be determined without the warrants, so the actual proceed of $10 million from the bond issuance will be credited to the bond payable account.

The Journal Entry will be as follow

Dr. Cash $10,000,000

Cr. Bond Payable $10,000,000