Question

Bengts Inc offered detachable 10-year warrants to buy six shares of common stock (par value $1) at $30 (at a time when the stock was selling for $35)The price paid for 500,$1,000 bonds with the warrants attached was $660,000. The market price of the Bengts bonds without the warrants was $540,000 and the market price of the warrants without the bonds was $90,000. What amount should be allocated to the bond premium or discount?

Answer 1

Particulars	$
Total proceeds received for bonds with detachable warrant	$      660,000
Allocation to warrants (14% X $660,000)	$         94,286
Allocation to bonds (86% X $660,000)	$      565,714
Face value of bonds	$      500,000
Premium on issue of bonds	$         65,714

Particulars	$	% proportion
Market value of bond without warrant	$      540,000	86%
Market value of warrant without bonds	$         90,000	14%
Total	$      630,000

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