Question

Question 5 Not complete Marked out of 21.00 P Flag question Recording Entries for Bonds with Warrants On July 1, 2020, Salem Corporation issued $400,000 of 7% bonds due in 10 years. The bonds pay cash interest semiannually. Each $1,000 bond includes a detachable stock purchase warrant, Each warrant gives the bondholder the right to purchase, for $30, one share of $1 par value common stock at any time during the next 10 years. The bonds were sold at 101. The value of the stock purchase rights at the time of issuance was $20,000. The bonds would sell without warrants at $388,000. Required a. Record the entry for issuance of bonds using the proportional method. b. Record the entry for issuance of bonds assuming instead that the warrants are not detachable. • Note: List multiple debits or credits (when applicable) in alphabetical order. • Note: Round your answers to the nearest whole dollar. Account Name Dr. Cr. Date 2. July 1, 2020 6. July 1, 2020 Check

Answer 1

Fair market value of bonds (without warrants) ($400,000 X 1.013 Fair market value of warrants Aggregate fair market value Allocated to bonds. 404,000/424000* $400,000 = $3814132 $404.000 20,000 $424.000 Allocated to warrants. 20.000/424 000X $400,000 $ 8.868 The journal entry for the issuance of the bonds is: Oash Discount on Bonds Payable Bonds Payable... Paid-in Capital-Stock Warrants. 400,000 18.868 When detachable warrants are exercised, Cash (400 X $30) Paid-in Capital-Stock Warrants Common Stock (400 x $1) Paid-in Capital in Excess of Par 400 30.468