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On August 1, 2019, United Corporation issued $9.50 million of 6% bonds at 104. The bonds...

On August 1, 2019, United Corporation issued $9.50 million of 6% bonds at 104. The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $45, one share of United $5 par common stock. World Company purchased 20% of the bond issue. On August 1, 2019, the market value per share for United stock was $51 and the market value of each warrant was $7. In March 2025, when United common stock had a market price of $65 per share and the unamortized premium balance was $250,000, World exercised the warrants it held.

Required:

1. Prepare the journal entries on August 1, 2019, to record (A) the issuance of the bonds by United and (B) the investment by World.

2. Prepare the journal entries for both companies in March 2025 to record the exercise of the warrants.

Solutions

Expert Solution

Ans
Journal Entries
Date Account Title Debit Credit
ISSUER-Issuance
Aug 1 2019 Cash
($9,500,000 * 104%)		 $9,880,000
Discount on Bonds
(balancing figure)		 $    950,000
Bonds Payable $   9,500,000
Paid in Capital - stock warrants outstanding
[(20*$7)*$9,500,000/1000]		 $   1,330,000
(To record issuance of bonds with stock warrants)
INVESTOR -Purchase of 20% of bond issue
Aug 1 2019 Investment in stock warrants
($1,330,000 * 20%)		 $    266,000
Investment in Bonds
($9,500,000 * 20%)		 $1,900,000
Discount on Bonds investment
(balancing figure)		 $       190,000
Cash
($9,500,000 * 104% * 20%)		 $   1,976,000
(To record invstment in bonds of United Corporation)
ISSUER- Exercise of warrants
Mar-25 Cash
[(42000 bonds *20%)*20*$45)]		 $7,560,000
Paid-in capital - stock warrants outstanding
($1,330,000*20%)		 $    266,000
Common Stock
[(42000 bonds *20%)*20*$5)]		 $       840,000
Paid in capital - in excess of par
(balancing figure)		 $   6,986,000
(To record exercise of warrants)
INVESTOR - Exercise of warrants
Mar-25 Investment in common stock
(balancing figure)		 $7,826,000
Investment in stock warrants
($1,330,000 * 20%)		 $       266,000
Cash
[(42000 bonds *20%)*20*$45)]		 $   7,560,000
(To record exercise of warrants of United Corporation)

ekkarill92 answered 4 months ago
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