Question

Blue Inc. has decided to raise additional capital by issuing $185,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $126,400, and the value of the warrants in the market is $31,600. The bonds sold in the market at issuance for $150,000.

a. What entry should be made at the time of the issuance of the bonds and warrants?
b. Prepare the entry if the warrants were nondetachable.

Answer 1

a)

Cash debit : $150000

Debit discount on BP : $65000

Credit BP : $185000

Credit Paid-in Capital- Stock Warrants : $30000

b)

Cash debit : $150000

Debit discount on BP : $35000

Credit BP : $185000

Step-by-step explanation:

Given that:

Issuance price = $150000, value of bonds without warrants = $126400, value of warrants = $31600,

Face value = $185000

a)

value assigned to bonds= [value of bonds without warrants/(value of bonds without warrants + value of warrants)] * issue price = [126400/(126400 + 31600)] * 1500000 = 126400 / 158000 * 150000 = $120000

value assigned to warrants = [value of warrants/(value of bonds without warrants+value of warrants)] * issue price = 31600 / (126400 + 31600) * 150000 = 31600 / 158000 * 150000 = $30000

Cash debit = Issuance price = $150000

Debit discount on BP = Face value - value assigned to bonds = $185000 - $120000 = $65000

Credit BP = face value = $185000

Credit Paid-in Capital- Stock Warrants = value assigned to warrants = $30000

b)

Cash debit = Issuance price = $150000

Debit discount on BP = Face value - issuance price = $185000 - $150000 = $35000

Credit BP = face value = $185000