Question

Matthew Industries issued $500,000 of their ten-year, 6% bonds for $535,000. Each $1,000 bond carries five warrants that allow the holder to purchase one share of $10 par common stock for $50. Shortly after issuance, the warrants were quoted on the market for $22 each (i.e., for a total of $55,000), and the bonds without the warrants sold in the market at 99 (i.e., for a total of $495,000). The stock warrants should be recorded at $_______________________

Answer 1

Solution:

The stock warrants should be recorded at $ 53,500.

Calculation:

1) Calculations:

	Market Price	Percent%
Bonds	$               495,000	90%
Warrants	$                 55,000	10%
Total Fair Market Value	$               550,000	100%
Allocation:	Bonds	Warrants
Issue Price	$               535,000	$                     535,000
Allocation %	90%	10%
Total	$               481,500	$                        53,500