Question

on september 30,2017, Gargiola inc. Issued 4millions of 10 year, 8% convertible bonds for 4.6millions. The bonds pay interest on march 31 and September 30 and mature on September 30, 2027. Each 1000$ bond can be converted into 80 no par value common shares. In addition, each bond include 20 detachable warrants. Each warrant can be used to purchase one common share at an exercise price of 15$. Immediately after the bond issuance, the warrants traded at 3$ each. Without the warrants and the conversion rights, the bonds would have been expected to sell for 4.2 million. On march 23, 2020, half of the warrants were exercised. The common shares of Gargiola inc. were trading at 20$ each on this day. Immediately after the payment of interest on the bonds, on september 30, 2022, all bonds outstanding were converted into common shares.

Required:

E) prepare the journal entry to account for the exercise of the warrants pro march 23, 2020. How many common shares were issued in this transaction?

Answer 1

Part e
	Account	Debit	Credit
	Cash (40,000*$15)	$                                                600,000
	Contributed Surplus-Stock warrants (40,000*$3)	$                                                120,000
	Common Shares (Plug in)		$                             720,000
	(To record half of warrants exercised)
	Number of warrant exercised	$4,000,000/$1,000*20 Warrants*1/2	40,000	warrants
	Number of Common Shares	40,000 warrantes *1	40,000	Shares