Question
In: Accounting
On August 1, 2021, Limbaugh Communications issued $44 million of 12% nonconvertible bonds at 105. The...
On August 1, 2021, Limbaugh Communications issued $44 million of
12% nonconvertible bonds at 105. The bonds are due on July 31,
2041. Each $1,000 bond was issued with 25 detachable stock
warrants, each of which entitled the bondholder to purchase, for
$30, one share of Limbaugh Communications’ no par common stock.
Interstate Containers purchased 20% of the bond issue. On August 1,
2021, the market value of the common stock was $28 per share and
the market value of each warrant was $6.
In February 2032, when Limbaugh’s common stock had a market price
of $42 per share and the unamortized discount balance was $1
million, Interstate Containers exercised the warrants it held.
Required:
1. Prepare the journal entries on August 1, 2021, to
record (a) the issuance of the bonds by Limbaugh and (b) the
investment by Interstate.
Journal entry worksheet
1.a) Record the issuance of the bonds by Limbaugh.
1.b) Record the investment by Interstate.
2. Prepare the journal entries for both Limbaugh
and Interstate in February 2032, to record the exercise of the
warrants.
2.a) Record the exercise of the warrants for Limbaugh
2.b) Record the exercise of the warrants for Interstate.
Solutions
Expert Solution
Solution:
1)
Prepare the journal entries on August 1, 2021, to record (a) the issuance of the bonds by Limbaugh and (b) the investment by Interstate.
| Date | Account title and explanation | Debit | Credit |
| 2021 1 Aug | Cash (44,000,000*105%) | $46,200,000 | |
| Discount on bonds payable | $4,400,000 | ||
| Bonds payable | $44,000,000 | ||
| Equity stock warrant (44,000,000/1,000*25*6) | $6,600,000 | ||
| (To record the issuance of the bonds) | |||
| 2021 1 Aug | Investment in stock warrants (6,600,000*20%) | $1,320,000 | |
| Investment in bonds (44,000,000*20%) | $8,800,000 | ||
| Discount on bond investment | $880,000 | ||
| Cash ($44,000,000*105%*20%) | $9,240,000 | ||
| (To record investment in bond) |
2)
Prepare the journal entries for both Limbaugh and Interstate in February 2032, to record the exercise of the warrants
| Date | Account title | Debit | Credit |
| 2032 Februray | Cash (1,100,000*20%*30) | $6,600,000 | |
| Equity stock warrant (6,600,000*20%) | $1,320,000 | ||
| Common stock | $7,920,000 | ||
| (To record execricise of equity warranty) | |||
| 2032 Februray | Investment in common stock | $7,920,000 | |
| Investment in stock warrants | $1,320,000 | ||
| cash warrants | $6,600,000 |
Notes:
No of bonds = $44,000,000/1,000 = 44,000 bonds
No of warrants = 44,000*25
=1,100,000
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