Question

On August 1, 2018, Limbaugh Communications issued $35 million of 10% nonconvertible bonds at 102. The bonds are due on July 31, 2038. Each $1000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $60. one share of Limbaugh Communications no par common stock. Interstate Containers purchased 20% of the bond issue. On August 2018, the market value of the common stock was $58 per share and the market value of each warrant was $6. In February 2029, when Limbaugh's common stock had a market price of $70 per share and the unamortized discount balance was $1 million, Interstate Contalders exercised the warrants It held. Required: 1. Prepare the journal entries on August 1, 2018, to record(a) the issuance of the bonds by Limbaugh and (b) the investment by Interstate 2. Prepare the journal entries for both Limbaugh and Interstate in February 2029 to record the exercise of the warrants

Answer 1

Solution Lembaugh (Issuer) cash (102% x 35 million) 35.7 Discount on bonds payable 3.8 Bonds payable (face amount) Equity - stock warranty [GX 20 warrants [ 35000 000 - 1000] bonde Interstate Investor) 0.84 Investment in Stock warrants [ 4.2 million X 20% Investment in bondes [ 20% X 35 millon] Discount on bonds (Difference) Cash (10,2% ¥ 35 million X 20%) 0.7; 7.14

2) 864 Lembaugh (Issuer) cash (20%. X 35000 bonds x 20 . warrants X 60) Equity - Stock warrants [ 4.2 million X 20%] Common Stock 0.84 9.24 Interstate (Investor) 9.24 0.84 Investment in common stock Investment in stock warrants [402 million X20%] Cash (20%* 350004 20 warrants X60) 8.4