Question

Shamrock Inc. has decided to raise additional capital by issuing $171,000 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 $115,200, and the value of the warrants in the market is $28,800. The bonds sold in the market at issuance for $140,000.

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

(b) Prepare the entry if the warrants were nondetachable.

Answer 1

Ans: Journal Entries

Entry	Account title and explanation	Debit($)	Credit($)
1.	Cash	140,000
	Discount on issue	55,800
	Paid in capital (Stock Warrant){140,000-115,200}		24,800
	Bonds Payable		171,000
	( to record issuance of bonds and detachable warrants)
2.	Cash	140,000
	Discount	31,000
	Bonds Payable		171,000
	( to record if warrants were nondetachable)
Note: for part A ,residual Allocation method had been used