Question

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)?

Answer 1

The following journal entry will be prepared to record the issuance of the bonds:

Date	Account Titles	Debit	Credit
Jun. 30, 216	Cash	8200000
	Discount on Bonds Payable (8000000 + 360000 - 8200000)	160000
	Bonds Payable		8000000
	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%