Question

Pronghorn Inc. has decided to raise additional capital by issuing $176,000 face value of bonds with a coupon rate of 11%. 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 $130,500, and the value of the warrants in the market is $14,500. The bonds sold in the market at issuance for $157,500.

(a) What entry should be made at the time of the issuance of the bonds and warrants? (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to 0 decimal places, e.g. 5,125.)

Account Titles and Explanation	Debit	Credit

(b1) Prepare the entry if the warrants were nondetachable. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to 0 decimal places, e.g. 5,125.)

Account Titles and Explanation	Debit	Credit

Answer 1

Market value of Bonds	130500
Market value of Warrants	14500
Total Market value	145000
Value allocated to Bonds	141750		=157500*130500/145000
Value allocated to Warrants	15750		=157500*14500/145000
Account Titles and Explanation	Debit	Credit
Cash	157500
Discount on Bonds Payable	34250
Bonds Payable		176000
Paid-in Capital - Stock Warrants		15750
b1
Account Titles and Explanation	Debit	Credit
Cash	157500
Discount on Bonds Payable	18500
Bonds Payable		176000