Question
In: Accounting
On August 1, 2018, Limbaugh Communications issued $22 million of 11% nonconvertible bonds at 105. The...
On August 1, 2018, Limbaugh Communications issued $22 million of 11% nonconvertible bonds at 105. The bonds are due on July 31, 2038. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of Limbaugh Communications’ no par common stock. Interstate Containers purchased 20% of the bond issue. On August 1, 2018, the market value of the common stock was $48 per share and the market value of each warrant was $10. In February 2029, when Limbaugh’s common stock had a market price of $62 per share and the unamortized discount balance was $2 million, Interstate Containers exercised the warrants it held. Required: 1. Prepare the journal entries on August 1, 2018, to record (a) the issuance of the bonds by Limbaugh and (b) the investment by Interstate. 2. Prepare the journal entries for both Limbaugh and Interstate in February 2029, to record the exercise of the warrants.
Solutions
Expert Solution
| Date | Account Titles and Explanation | Debit | Credit | |
| 1. a | Aug-01 | Cash ($22Million*105%) | 23100000 | |
| Discount on Bond Payable | 3300000 | |||
| Bond Payable (Face Value) | 22000000 | |||
| Equity Stock Warrant ($22Million/$1,000*40Warrants* $10) | 4400000 | |||
| (To record issuance of bond) | ||||
| 1. b | Aug-01 | Investment in Stock warrants ($4.4Million*20%) | 880000 | |
| Investment in Bods ($22Million*20%) | 4400000 | |||
| Discount on Bonds (Plug in) | 660000 | |||
| Cash ($22Million*105%*20%) | 4620000 | |||
| (To record invetment in bonds and warrants) | ||||
| 2 | Limbaugh - Issuer | |||
| Feb-29 | Cash (22,000 Bonds*40 Warrants*$50)*20% | 8800000 | ||
| Equity Stock Warrants ($4.4Million*20%) | 880000 | |||
| Common Stock (Plug in) | 9680000 | |||
| (To record warrant exercise) | ||||
| Interstate-Investor | ||||
| Feb-29 | Investment in Common Stock | 9680000 | ||
| Investment in Stock warrants ($4.4Million*20%) | 880000 | |||
| Cash (22,000 Bonds*40 Warrants*$50)*20% | 8800000 | |||
| (To record warrant exercise) |
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