Question

1. On April 1, 2020, Sydney Company issued 300 $1,000 bonds at 98. Each bond was issued with two detachable stock warrants. Shortly after issuance, the bonds were selling at 96, and the warrants were selling for $50 each.

Instructions:

Prepare the entry to record the issuance of the bonds and warrant

2.

The Cinci Company issues $100,000, 10% bonds at 103 on April 1, 2020. The bonds are dated January 1, 2020 and mature six years from that date. Straight-line amortization is used. Interest is paid annually each December 31. Compute the bond carrying value as of December 31, 2023.

Answer

$_______________

Answer 1

Question 1

Computation of Fair Value Proportions:

Total Fair Value of bond     = 96 + (2 X 50) = 196

Proportion for Bond part     = 96/196

Proportion for warrant part = 50/196

Appropriation of proceeds:

Total Proceeds         = 300 X $1000 X 98 =          $ 29,400,000

Bond part                   =          $29,400,000 x 96/196      =          $ 14,400,000

Warrant Part              =          $29,400,000 x 50/196        =          $ 7,500,000

Journal Entry: Dr    Cr

            Bank    $ 29,400,000

   Bonds payable A/c $ 14,400,000

Warrants A/c $ 7,500,000

Question 2

No of month for amortization = 6 X 12 = 72

Month from April 1,2020 to December 31,2023 = 3 X 12 + 9 = 45

Bond issue price = 100,000 X 1.03 = 103,000

Premium on bonds payable = 103,000 - 100,000 = $ 3,000

Amortized premium = 3,000 X 45 / 72 = $ 1,875

Unamortized premium = 3,000 - 1,875 = $ 1,125

Carrying value on December 31,2023 = 100,000 + 1,125 = $ 101,125