Question

ABC Company Issues $5,000,000 of bonds with a stated rate of 8% (5,000 at $1,000 each). To help with the sale, detachable warrants are issues at the rate of ten (10) warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $4,935,000 and the value of the warrants is $315,000. The bonds with the warrants sold at 101. Using proportional method

1. Prepare the journal entry to record the sale of the bonds with the detachable warrants.

2. Prepare the journal entry to record the sale of the bonds if the warrants were undetachable (use same selling price)

Answer 1

Ans:

Market value	%	I		Proceeds in %	Value allocated P*I
Bonds	$ 4,935,000	4935000/5250000*100	94	%	5050000	4747000
Warrants	315000	315000/5250000*100	6	%	5050000	303000
Total	$ 5,250,000					5050000

501,000=500,000*101

Event	Accounts title	Dr	Cr
a	Cash	$ 5,050,000
	Discount on Bonds payable (5000000-4747000)	253000
	Bonds payable		5000000
	Paid in capital-Stock warrant		303000
b	Cash	5050000
	Premium on bonds payable		50000
	Bonds payable		5000000
	(to record sale of bonds if the warrants are undetacahable)

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