Question

Safola inc. requires funding to build a new factory and has decided to raise the additional capital by issuing $850,000 face value of bonds with a coupon rate of 10%. 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 5 warrants for each $1,000 bond sold (in total 4,250 shares of warrants were issued with the bonds). The value of the bonds without the warrants is considered to be $775,000, and the value of the warrants in the market is $75,000. The bonds sold in the market at issuance for $825,000.

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

2) The exercise price of the warrants is $10. The current market price of the common stock is $20. The par value of the common stock is $5. Assuming investors exercise all of the warrants (one warrant per one share of stock). Prepare the journal entry to record the exercise of warrants.

Answer 1

SOLUTION:

GIVEN THAT ,

Additional capital issuing $8,50,000 (F.V) @

coupon rate 10 %

Actual bond value = 752205.882

{ Note : 825000/(775000+75000) * 775000 }

Market value to warrents = 72794.11

{ Note : 825000 / (775000 + 75000) * 75000

1)

CASH A/C DR. 825000

DIS. ON BONDS PAYABLE A/C DR 97794

($850000 - $752206 )

BONDS PAYABLE 850000

WARRENTS PAID-IN CAPITAL 72794

STOCK

(NARRATION : THE VALUE OF BONDS ISSUED WITH WARRENTS )

2)

MARKET PRICE OF THE WARRENTY = $20

EXCERCISE PRICE OF COMMON STOCK = $10

NOTE = I WARRENT = I SHARE STOCK

PRICE OF EXERCISE SHARE VALUE = $(20+10)=$30

MARKET PRICE OF COMMON STOCK = $20

JOURNAL ENTRY

CASH A/C DR 825000

DISCOUNT ON BOND

PAYABLE A/C DR 25000

BOND PAYABLE 850000

( NARRATION : BONDS SOLD IN THE MARKET VALUE IS $850000 )

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