Question

E16.9 (LO 2) (Issuance of Bonds with Stock Warrants) On May 1, 2020, Friendly Company issued 2,000 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined. Instructions a. Prepare the entry to record the issuance of the bonds and warrants. b. Assume the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry to record the issuance of the bonds and warrants.

Answer 1

Required a:

Date	General Journal	Debit	Credit
May 1, 2020	Cash (2,000 * $1,000) * 102%	$2,040,000
	Discount on bonds payable (2,000,000 * 2%)	$40,000
	Bonds payable (2,000 * $1,000)		$2,000,000
	Paid-in capital - Stock warrant [2,040,000 - (2,000,000*98%)]		$80,000

Required b:

Date	General Journal	Debit	Credit
May 1, 2020	Cash (2,000 * $1,000) * 102%	$2,040,000
	Discount on bond payable ($2,000,000 - $1,979,406)	$20,594
	Bonds payable		$2,000,000
	Paid-in capital - Stock warrant		$60,594

Working:

• Calculation of aggregate fair market value of bonds and warrant:

Fair market value of bonds = (2,000 * $1,000) * 98% = $1,960,000

Fair market value of stock warrant = 2,000 * $30 = $60,000

Aggregate value = $1,960,000 + $60,000 = $2,020,000.

• Allocation of cash received from sale of bonds to bonds and stock warrant:

Allocated to bonds = $2,040,000 * ($1,960,000 / $2,020,000) = $1,979,406.

Allocated to warrants = $2,040,000 * ($60,000 / $2,020,000) = $60,594