Question

Exercise 16-08

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On September 1, 2020, Novak Company sold at 104 (plus accrued interest) 5,880 of its 8%, 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 $13 per share. Shortly after issuance, the warrants were quoted on the market for $3 each. No fair value can be determined for the Novak Company bonds. Interest is payable on December 1 and June 1.

Prepare in general journal format the entry to record the issuance of the bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Answer 1

Account Titles and Explanation	Debit	Credit
Cash	$6,232,800
Bonds Payable (5,880 Bonds x $1,000 face value)		$5,880,000
Premium on Bonds ($6,079,920 - $5,880,000)		$199,920
Paid in Capital - Stock Warrants		$35,280
Interest Payable (FV x std rate x time = $5,880,000 x 8% x 3/12 months)		$117,600
Working
Lump Sum Receipt (5,880 Bonds x $1,000 face value x 104%)	$6,115,200
Less: Amount allocated to warrants (5,880 Bonds x 2 warrants x $3/warrant)	$35,280
Balance allocated to bonds	$6,079,920