Question

On January 1, 2014, Smith Corp. issued both bonds and stock purchase warrants in a single transaction, and Smith received a total of $3,300,000 cash from that transaction. The bonds have a face amount of $3,000,000, and they pay interest at 12% annually on December 31. Each $1,000 par value bond includes 10 detachable stock purchase warrants. At the time of issuance, the warrants were selling for $6.50 each and the bonds (without the warrants) were selling at 103.

Prepare the journal entry (entries) to record this transaction. Answers should be rounded to the nearest whole dollar.

Answer 1

Solution:

Bond issuance price: $3,300,000
Fair market value of bonds without warrants: 3,000,000 x 103% = $3,090,000
Fair market value of warrants: 3000*10 x $6.50 = $195,000
Total fair market value = $3,285,000
Allocated to bonds = ($3,090,000 / 3,285,000) x $3,300,000 = $3,104,110
Allocated to warrants = ($195,000 / 3,285,000) x $3,300,000 = $195,890

Journal Entries - Smith Corporation
Date	Particulars	Debit	Credit
1-Jan-14	Cash Dr	$3,300,000.00
	To Bond Payable		$3,000,000.00
	To Premium on bond payable		$104,110.00
	To Paid in capital - Stock warrant		$195,890.00
	(To record issue of bonds)