In: Accounting
2. Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained
detachable stock warrants for 100 shares of Ray's common stock. Total proceeds from the
issue amounted to $240,000. The market value of each warrant was $2, and the market value
of the bonds without the warrants was $196,000. The bonds were issued at a discount of
(rounding the allocation percentage to two decimal places):
a. $0
b. $800
c. $4,000
d. $33,898
First, we have to allocate the $ 240000 proceeds received into bond and equity portion using proportionla method. Under proportional method, proceeds is allocated to equity and bond portion on the basis of Market value
Calculation of Market Value
Bonds Market value without warrants = $ 196000
Market value of warrants = No. of bonds * stock warrants per bond * market value per warrants
= (200000/1000)*100*2 = 200*100*2 = $ 40000
Calculation of relative portion
Particulars | Market Value | Allocation % |
Bonds without warrant | $ 196000 | 196000/236000*100 =83.05% |
Warrants | $ 40000 | 40000/236000 *100 = 16.95% |
Total | $ 236000 | 100% |
So bonds portion =Bonds allocation % * Total proceeds = 83.05% * 240000 = 199320
so Bonds are issued at a discount of $ 680 (200000-199320)
Please Note: Answer is coming to $ 680 which is not there in option, however if we take the allocation % as 83%, then discount = 200000- (83%of 240000) = 200000 - 199200 = $ 800