(Issuance of Bonds with Detachable Warrants) On September 1, 2007, Sands Company sold at 104 (plus accrued interest) 4,000 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common stock at a specified option price of $15 per share. Shortly after issuance, the warrants were quoted on the market for $3 each. No market value can be determined for the Sands Company bonds. Interest is payable on December 1 and June 1. Bond issue costs of $30,000 were incurred.
SANDS COMPANY
Journal Entry
September 1, 2007
Cash ……………………………………………………………………….. 4,220,000
Unamortized Bond Issue Costs………………………………………………… 30,000
Bonds Payable (4,000 X $1,000)……………………………………… 4,000,000
Premium on Bonds Payable—Schedule 1………………………… 136,000
Paid-in Capital—Stock Warrants—
Schedule 1…………………………………………………………………. 24,000
Bond Interest Expense—Schedule 2……………………………….. 90,000
(To record the issuance of the bonds)
Schedule 1
Premium on Bonds Payable and Value of Stock Warrants
Sales price (4,000 X $1,040) $4,160,000
Face value of bonds 4,000,000
160,000
Deduct value assigned to stock warrants
(4,000 X 2 = 8,000; 8,000 X $3) 24,000
Premium on bonds payable $ 136,000
Schedule 2
Accrued Bond Interest to Date of Sale
Face value of bonds $4,000,000
Interest rate 9%
Annual interest $ 360,000
Accrued interest for 3 months – ($360,000 X 3/12) $ 90,000
EXERCISE 16-9 (10–15 minutes)
(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)
