Question

During 2018, Bramble Corp. issued at 105 460, $1000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Bramble’s common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 97. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Bramble’s stockholders' equity?

A.

$19320

B. $0

C. $18160

D. $18400

Answer 1

$19,129

The proceeds of the issue ($483,000 because the bonds were issued at 1.05) is allocated based on the relative fair values of the two securities. The total market value of the two securities after issuance is $464,600 [(460,000 × 0.97) + (460× $40)]. The allocation to the stockholders' equity $19,129 ($18,400 x $483,000/$464,600)

But if the market value of the bonds, without the stock warrants, was quoted at 96 then the allocation to the stockholders' equity $19,320