Question

On August 1, 2018, Limbaugh Communications issued $22 million of 11% nonconvertible bonds at 105. The bonds are due on July 31, 2038. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of Limbaugh Communications’ no par common stock. Interstate Containers purchased 20% of the bond issue. On August 1, 2018, the market value of the common stock was $48 per share and the market value of each warrant was $10. In February 2029, when Limbaugh’s common stock had a market price of $62 per share and the unamortized discount balance was $2 million, Interstate Containers 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

Date	General Journal	Debit	Credit
Aug 1 2018	Cash 105*22000000	23100000
	Discount on bonds payable	7700000
	Bonds payable		22000000
	Equity—stock warrants 22,000,000 / $1,000*40*10		8800000
Feb-29	Cash 880000*20%*$50	8800000
	Equity—stock warrants 8800000*20%	1760000
	Common stock		10560000