Question

Monty Corporation issued 1,800 $1,000 bonds at 103. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 99, and the warrants had a market price of $33.

Use the proportional method to record the issuance of the bonds and warrants. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to 0 decimal places, e.g. 5,125.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount

Answer 1

Answer:

Issue price = 1,800 x $1,000 x 1.03= $1,854,000

Market value of bonds after issuance = 1,800 x $1,000 x .99 = $1,782,000

Market price of warrants after issuance = 1,800 x $33 = $59,400

Therefore,

Total fair market value of the bonds and warrants after issuance = $1,782,000 + $59,400 = $1,841,400

Allocate the issue price of $1,854,000 to bonds and warrants on the basis of their fair market values.

Issue price allocated to bonds = $1,854,000 x $1,782,000/$1,841,400 = $1,794,194

Issue price allocated to warrants = $1,854,000 x $59,400/$1,841,400 = $59,806

Record the issuance through the following journal entry:

Account Titles and Explanation	Debit	Credit
Cash	1,854,000
Discount on Bonds Payable ($1,800,000 - $1,794,194)	5,806
Bonds Payable		1,800,000
Paid-in Capital - Stock warrant		59,806