Question

Metlock Inc. has decided to raise additional capital by issuing $189,000 face value of bonds with a coupon rate of 9%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $131,750, and the value of the warrants in the market is $23,250. The bonds sold in the market at issuance for $152,500.

(a) What entry should be made at the time of the issuance of the bonds and warrants?

(b1) Prepare the entry if the warrants were nondetachable

Answer 1

Value assigned to bonds

=[ (Value of bonds without warrant) / (Value of bonds without warrants + Value of warrants) ] * Issue price

= [ ( $ 131,750 ) / ($ 131750+23250) ] * $ 152500

= $ 1,29,625

Value assigned to warrants

=[ (Value of warrant) / (Value of bonds without warrants + Value of warrants) ] * Issue price

= [ ( $ 23250 ) / ($ 131750+23250) ] * $ 152500

= $ 22,875

(a)Entry should be made at the time of the issuance of the bonds and warrants

Cash    A/c                                                       Dr    $ 152500

Discount on Bonds Payable    A/c                   Dr      $ 59375

($ 189000 - 129625)     

      To Bonds Payable          A/c              Cr                         $ 189000

        To Paid-in Capital - Stock Warrants Cr                         $ 22,875

(b1)Entry if the warrants were non detachable

Cash                                       A/c     Dr     $ 152500

Discount on Bonds Payable    A/c     Dr     $ 36500

          To Bonds Payable         A/c    Cr                         $ 189000