Question

Pharoah Inc. has decided to raise additional capital by issuing $173,000 facevalue of bonds with a coupon rate of 6%. In discussions with investment bankers, it was determined that to help the sale of thebonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bondswithout the warrants is considered to be $155,700, and the value of the warrants in the market is $20,760. The bonds sold in the market at issuance for $174,600.

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 non-detachable.

Answer 1

a. Debit Credit

Cash $174,600

Discount on bond payable $18,941

Bonds Payable $173,000

Paid -in Capital - Stock Warrants $20,541

Workings

Market value of Bonds 155,700

Market value of Warrants 20,760

Total market value 176,460

Value assigned to Bonds = 174,600 / 176,460 * 155,700 = 154,059

Value assigned to Warrants = 174,600 / 176,460 *20,760 = 20,541

b. Debit Credit

Cash $174,600

Discount receivable $1,600

Bonds Payable $173,000