Question

a) What entry should be made at the time of the issuance of the bonds and warrants?

b) If the warrants were nondetachable, would the entries be different? Discuss.

E16.7 (LO 2) (Issuance of Bonds with Warrants) Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bank- ers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000

Answer 1

(a) Entry to be made at the time of issuance of bonds and warrants.

Particulars	Debit	Credit
Cash	$152,000
Discount on bonds payable	$40,800
Bonds payable		$170,000
Paid in capital stock warrants ($152,000/(136,000+24,000)*24,000		$22,800

(b) Entry if warrants were non detachable

Particulars	Debit	Credit
Cash	$152,000
Discount on bonds payable $170,000-$152,000)	$18,000
Bonds payable		$170,000