Question

On August 1, 2021, Limbaugh Communications issued $30 million of 10% nonconvertible bonds at 104. The bonds are due on July 31, 2041. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $60, 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 $58 per share and the market value of each warrant was $8. In February 2032, when Limbaugh’s common stock had a market price of $72 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. 2. Prepare the journal entries for both Limbaugh and Interstate in February 2032, to record the exercise of the warrants.

Answer 1

Ans:

1. Journal Entries

Date	Account title and explanation	Debit($)	Credit($)
	Cash{30 million*104%}	31.2 million
	Discounts on Bonds Payable	3.6 Million
	Equity- Stock Warrants{30,000*20*$8)		4.8 Million
	Bonds Payable		30 Million
	( to record issuance of common Stock)
	Investment in Stock Warrants {4.8 million*20%)	0.96 million
	Investment in Bonds{30 million *20%)	6 Million
	Discount on Bonds		0.72 Million
	Cash{30 million*104%*20%}		6.24 Million
	{ to record the investment in bonds}

2.Prepare the journal entries for both Limbaugh and Interstate in February 2032, to record the exercise of the warrants.

date	Account title and Explanation	Debit($)	Credit($)
Feb,2032	For Company-issuer
	Cash{30,000*20*60*20%)	7.2 Million
	Equity- Stock Warrants{4.8 Million*20%)	0.96 Million
	Common Stock		8.16 Million
	{ to record the issuance of Stock}
For Feb 2032	For Company-Investor
	Investment in Common Stock	8.16 Million
	Investment in Stock Warrants		0.96 Million
	Cash		7.20 Million
	{ to record the issuance of Stock}