Question

Use the following information for questions 28 and 29. On May 1, 2014, Payne Co. issued $900,000 of 7% bonds at 102, which are due on April 30, 2024. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne’s common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2014, the fair value of Payne’s common stock was $35 per share and of the warrants was $2.

28. On May 1, 2014, Payne should credit Paid-in Capital from Stock Warrants for

a. $36,560.

b. $36,720.

c. $37,080.

d. $65,000.

29. On May 1, 2014, Payne should record the bonds with a

a. discount of $36,000.

b. premium of $10,080.

c. discount of $18,720.

d. premium of $27,000.

Answer 1

Solution 18:

Bond issuance price: 900,000 x 1.02 = $918,000
Fair market value of bonds without warrants: 900,000 x 96% = $864,000
Fair market value of warrants: 900 x 20 * $2 = $36,000
Total fair market value = $864,000 + $36,000 = $900,000
Allocated to bonds = ($864,000 / $900,000) x 918,000 = $881,280
Allocated to warrants = ($36,000 / $900,000) x $918,000 = $36,720

Therefore Payne should credit Paid-in Capital from Stock Warrants for $36,720

Hence option b is correct.

Solution 29:

Face value of bond = $900,000

receipt allocated to bond = $881,280

Discount on issue of bond = $900,000 - $881,280 = $18,720

Hence option c is correct