Bonds with Detachable Warrants. On June 30, 2016, Cano Corporation issued $8 million of 4% bonds for $8,200,000. Each $1,000 bond was issued with 15 detachable stock warrants, each of which entitled the bondholder to purchase one share of Cano’s no-par common stock for $45. Immediately after the issuance of the bonds, the warrants were separately trading for $3 each. Prepare the journal entry to record the issuance of these bonds. For 2 points extra credit, calculate the effective interest rate on the bond portion of this sale, assuming the bonds mature in 10 years. (Calculator set on END)?
The following journal entry will be prepared to record the issuance of the bonds:
|Jun. 30, 216||Cash||8200000|
|Discount on Bonds Payable (8000000 + 360000 - 8200000)||160000|
|Equity - Stock Warrants (8,000 x 15 x $3)||360000|
Note: If the account title "Equity - Stock Warrants" is not available in the list, "Additional Paid-in Capital - Stock Warrants" can be used in place of it.
Effective interest rate will be calculated as follows:
Cash interest to be paid annually = 8,000,000 x 4% = 320,000
Carrying value of bonds on the date of issue = 8,000,000 - 160,000 = 7,840,000
Effective interest rate = 320,000 / 7,840,000 = 4.08%
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