Question

Acme Corp. issued $500,000 of its ten-year 6% bonds at 104. Each $1,000 bond carries ten warrants. Each warrant allows the holder to purchase one share of $10 par common stock for $50. Following the sale, relevant market values were:

Bonds $980 each (ex rights)

Warrants $14 each

Common stock $60 each

The entry to record the exercise of 1,500 warrants would include a

a. debit to Cash for $19,500

b. debit to Common Stock for $15,000

c. credit to Additional Paid-in Capital on Common Stock for $79,500

d. credit to Additional Paid-in Capital on Common Stock for $60,000

Answer 1

Answer The Correct Option is (c) credit to Additional Paid-in Capital on Common Stock for $79,500 Credit Explanations The entry to record the exercise of 1,500 warrants journalize as follows General Journal Debit Cash (1,500 x $50) $75,000 Paid-In Capital - Stock Warrants [(1,500 / 5,000) $65,000] $19,500 Common Stock (1,500 x $10) Paid-In Capital in Excess of Par [($75,000 + $19,500) - $15,000] (To record the exercise of warrants) $15,000 $79,500 ** Number of Warrant Issued = ($500,000/$1,000) x 10 = 5,000 warrants Issue Price of Bonds = $500,000 x 1.04 = $520,000 Value of bonds issued without warrants = ($500,000 / $1,000) x $980 = value of Warrants = (5,000 x $14) = $490,000 $70,000 $560,000 Allocated to Bonds = ($490,000 / $560,000) x $520,000 = $455,000 Allocated to Warrants = ($70,000 / $560,000) < $520,000 = $65,000