Question

A Company issued 2,000, $100 bonds with the warrants attached for $205,000. Detachable 2- year warrants...

A Company issued 2,000, $100 bonds with the warrants attached for $205,000. Detachable 2-

year warrants to buy one share of common stock were attached. The bonds were quoted at 90

without the warrants. The market price of the warrants without the bonds was $10. What

amount should be allocated to the warrants?

a. $20,000

b. $20,500

c. $24,000

d. $0

Refer back to the prior problem. Assume the warrants are not detachable. What amount, if

any, of the proceeds from the issuance should be accounted for as part of stockholders' equity?

a. $20,000

b. $20,500

c. $24,000

d. $0

Business   Accounting   
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Answer #1

Answer to 1st Question: The correct answer is "B" : $20,500

Reason:

Amount to be allocated to warrant = (Market Value of Warrant/(Market Value of Warrant + Market Value of Bonds)) * Issue price of bonds

Amount to be allocated to warrant = (2,000*$10/(2,000*$10+2,000*$90)) * $205,000

Amount to be allocated to warrant = ($20,000/$200,000)*$205,000

Amount to be allocated to warrant = $20,500

Answer to 2nd Question: The correct answer is "D" : $0

Reason: Where bonds are issued with non detachable warrants, we have to include both the price of the bond as well as the value of warrant in the liability portion only since the warrants cannot be sold separately.

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