Question

On July 1, 2020, Salem Corporation issued $800,000 of 7% bonds due in 10 years. The bonds pay cash interest semiannually. Each $1,000 bond includes a detachable stock purchase warrant. Each warrant gives the bondholder the right to purchase, for $30, one share of $1 par value common stock at any time during the next 10 years. The bonds were sold at 101. The value of the stock purchase rights at the time of issuance was $40,000. The bonds would sell without warrants at $776,000.

Required

a. Record the entry for issuance of bonds using the proportional method.

b. Record the entry for issuance of bonds assuming instead that the warrants are not detachable.

Answer 1

Solution:

Requirement a:

1)	Proportional Method: Detachable
Date	Account Titles and Explanation	Debit	Credit
July. 1	Cash	$         808,000
	Discount on Bonds Payable	$           31,608
	Bonds Payable		$            800,000
	Paid-In-Capital-Stock Warrants		$              39,608
	(To record bond and warrant issue)

Notes:

1)

	Market Price	Percent%
Bonds	$               776,000	95%
Warrants	$                 40,000	5%
Total Fair Market Value	$               816,000	100%
Allocation:	Bonds	Warrants
Issue Price	$               808,000	$                     808,000
Allocation %	95%	5%
Total	$               768,392	$                        39,608

2) Discount on Bonds Payable

Bond Face Value	$       800,000
Allocated Value	$     (768,392)
Discount	$         31,608

Requirement b:Non Detachable

Date	Account Titles and Explanation	Debit	Credit
July. 1	Cash	$         808,000
	Premium on Bonds Payable		$                8,000
	Bonds Payable		$            800,000
	(To record bond issue)

Notes:

1)

	No.Of Units(a)	Amount per unit(b)	Total (a*b)
Bonds Issue Value	800	$                          1,010	$                  808,000
Bond Face Value	$               800,000
Issued Value	$               808,000
Premium	$                    8,000