Question

Please help!

Fort Company issued 5,500 of its $1,000 par value bonds for $1,520, providing total cash proceeds of $8,360,000. The market price of Fort's common shares on the date that it issued the bonds was $22 per share. It sold the bonds with 385,000 detachable warrants to acquire 385,000 shares of the company's $1 par value common stock for $22 per share. That is, each bond carries 70 warrants x 5,500 bonds = 385,000 shares. Fort had existing bonds outstanding that trade without warrants at $1,300. Prepare the journal entry to record the issuance of the bonds assuming that the incremental method is used and the market value of the warrants is not reasonably determinable. (Record debits first, then credits. Exclude explanations from any journal entries.) Account Date of Issue Cash Discount on Bonds Payable Bonds Payable Additional Paid-in Capital—Stock Warrants

Answer 1

Solution:

Incremental Method: Detachable
Account	Date of Issue
Cash	$          8,360,000
Premium on Bonds Payable		$               1,650,000
Bonds Payable		$               5,500,000
Paid-In-Capital-Stock Warrants		$               1,210,000
(To record bond and warrant issue)

Working:

1)

	No.Of Units(a)	Warrants per Bond(b)	Total Units(c=a*b)	Amount per unit(d)	Total (c*d)	Percent%
Bonds	5500		5500	$                                             1,300	$   7,150,000	100%
Warrants	5500	70	385000	$                                                    -	$                   -	0%
Total Fair Market Value of Bonds					$   7,150,000	100%

2)

Allocation:	Bonds
Issue Price	$       8,360,000		Bond Face Value(5500*1000) (a)	$                                     5,500,000
Bonds	$       7,150,000		Allocated FMV (b)	$ 7,150,000
Warrants	$       1,210,000		Premium(b-a)	$ 1,650,000