Question

During the fiscal year, Toy Co. issued bonds with a face value amount of $1.2 million for 105. One detachable stock warrant was attached to each of the $1,000 bonds, and each warrant permits the bearer to purchase 10 shares of Toy’s common stock at $18 per share. The market price of the stock is currently $22 per share. Each bond has a fair value of $940 without a warrant, and each warrant trades for $50. Prepare the journal entry to record the issuance of the bonds and warrants

Answer 1

Solution: Journal Entry for Bond Issue with warrant.

Account	Debit	Credit
Cash	$          1,260,000
Discount on Bonds Payable	$                  3,636
Bonds Payable		$               1,200,000
Paid-In-Capital-Stock Warrants		$                     63,636
(To record bond and warrant issue)

Working:

1) Calculation of Fair market values.

	No.Of Units(a)	Warrants per Bond(b)	Total Units(c=a*b)	Amount per unit(d)	Total (c*d)	Percent%
Bonds	1200		1200	$                                                 940	$         1,128,000	94.95%
Warrants	1200	1	1200	$                                                   50	$               60,000	5.05%
Total Fair Market Value of Bonds					$         1,188,000	100%

2) Allocation of Values

Allocation:	Bonds	Warrants
Issue Price	$       1,260,000	$                      1,260,000
Allocation %	94.95%	5.05%
Total	$       1,196,364	$                            63,636

3) Calculation of Discount / Premium

Bond Face Value(1200*1000)	$                                     1,200,000
Allocated FMV	$                                  (1,196,364)
Discount	$                                             3,636