Illiad Inc. has decided to raise additional capital by issuing $170,000 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 $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000.
Hint: (LO 3)
Instructions
a.
What entry should be made at the time of the issuance of the bonds and warrants?
b.
If the warrants were nondetachable, would the entries be different? Discuss.
(a) Basic formulas:
| Value of bonds without warrants | X Issue price = Value assigned to bonds |
| Value of bonds without warrants + Value of warrants |
| Value of warrants | X Issue price = Value assigned to warrants |
| Value of bonds without warrants + Value of warrants |
| $136,000 | X $152,000 = $129,200 Value assigned to bonds |
| $136,000 + $24,000 |
| $24,000 | X $152,000 = | 22,800
$152,000 |
Value assigned to warrants
Total |
| $136,000 + $24,000 |
Cash ………………………………………………………………………… 152,000
Discount on Bonds Payable……………………………………………………. 40,800
($170,000 – $129,200)
Bonds Payable……………………………………………………………… 170,000
Paid-in Capital—Stock Warrants…………………………………. 22,800
(b) When the warrants are non-detachable, separate recognition is not given to the warrants. The accounting treatment parallels that given convertible debt because the debt and equity element cannot be separated.
The entry if warrants were non-detachable is:
Cash ………………………………………………………………………… 152,000
Discount on Bonds Payable……………………………………………………. 18,000
Bonds Payable……………………………………………………………… 170,000
E16-9(Issuance of Bonds with Stock Warrants) On May 1, 2007, Friendly Company issued 2,000 $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 market value of the warrants cannot be determined.
Hint: (LO 3)
Instructions
a.
Prepare the entry to record the issuance of the bonds and warrants.
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.
(a) Cash ($2,000,000 X 1.02)……………………………………….. 2,040,000
Discount on Bonds Payable……………………………………. 40,000
[(1 – .98) X $2,000,000]
Bonds Payable…………………………………………………. 2,000,000
Paid-in Capital—Stock Warrants…………………….. 80,000*
*$2,040,000 – ($2,000,000 X .98)
(b) Market value of bonds without warrants $1,960,000
($2,000,000 X .98)
Market value of warrants (2,000 X $30) 60,000
Total market value $2,020,000
| $1,960,000 | X $2,040,000 = $1,979,406 Value assigned to bonds |
| $2,020,000 |
| $60,000 | X $2,040,000 = $ 60,594 Value assigned to warrants
$2,040,000 Total |
| $2,020,000 |
Cash………………………………………………………………………………………………… 2,040,000
Discount on Bonds Payable…………………………………………………………………… 20,594
Bonds Payable………………………………………………………………………………………….. 2,000,000
Paid-in Capital—Stock Warrants………………………………………………………………. 60,594
