Question

A Company issued a bond payable with detachable warrants on January 1, 20X1 as follows.

Bond payable ($1,000 par value; 400 bonds) $400,000
Coupon rate 4.70%
Bond issue price $414,000
Fair value of the bonds after issuance $390,000
Term 10 years
Number of detachable warrants per bond 50
Fair value of the warrants after issuance $2.00
Stock purchase price $15.00
Warrants exercised 5,000

Required:
1 warrant = 1 share of $1 par value stock
1) What is the interest expense in 20X1?
2) What is the credit to additional paid in capital at the time the warrants are exercised on June 30, 20X1?

Answer 1

The interest expense in 20X1 is $19,398. When the warrants are exercised, the credit to additional paid-in capital is $65,000.

Step-by-step explanation:

This question is regarding the interest expense and credit to additional paid-in capital when a company issues a bond payable with detachable warrants.

To calculate the interest expense in 20X1, we need to multiply the bond issue price by the coupon rate.

The bond issue price is $414,000 and the coupon rate is 4.70%.

Therefore, the interest expense in 20X1 is $19,398 ($414,000 * 4.70%).

When the warrants are exercised, the company issues new shares of stock.

Each warrant can be exchanged for one share of $1 par value stock. In this case, 5,000 warrants are exercised, so there will be an increase of 5,000 shares of stock.

The credit to additional paid-in capital is calculated by multiplying the number of shares issued by the excess of the stock purchase price over the fair value of the warrants after issuance.

The stock purchase price is $15.00 and the fair value of the warrants after issuance is $2.00.

Therefore, the credit to additional paid-in capital is $65,000 (5,000 shares * ($15.00 - $2.00)).