(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.
Hint: (LO 3)
Instructions
Prepare in general journal format the entry to record the issuance of the bonds. (AICPA adapted)
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)
