Question

Prepare the journal entries for the following transactions involving stock warrants

A. The firm issues 5-year warrants that give the holder the right to purchase a share of common stock with a par value of $1 for $10.

B. The firm sells 500 bonds with detachable stock warrants for $600,000. The 5-year warrants give the holder the right to purchase a share of $1 par value common stock for $10. The firm has determined that the fair value of the warrants is $2500 and the fair value of the bonds without warrants was $550,000.

C. All the warrants are exercised.

Answer 1

A)

SHARE WARRANT DR CR

Retained earnings A/c Dr   

to warrants outstanding

(stock warrant issued for a par value of $1 for $10)

B)

Bond with detachable stock warrant.

1)Retained earnings A/c Dr

to warrants outstanding

(when warrants are issued)

2)

Cash A/c Dr $600,000

warrants outstanding A/c Dr $50,000

to bond $5,50,000

to common stock $50,000

C)

when warrants are exercised

1)

cash A/c Dr

warrants outstanding A/c Dr

To common stock

2)

cash A/c Dr

warrants outstanding A/c Dr

to common stock

to bond payable