Question

On May 1, 2014, Payne Co. issued $900,000 of 7% bonds at 102, which are due...

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.

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.

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.

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Answer #1

Solution1)-

The Correct Option is Option-b i.e. $36,720

Working-

Particulars Amount
Bonds($900,000*1.02) $918,000
No.of Warrants Issued($900,000/$1000par value)*20 Warrants $18,000
Fair Value of Warrant(18000*2) $36,000
Fair market value of convertible debt with out warrants($900,000*0.96) $864,000
Total Fair Value $900,000
Additional Paid-up Capital (36,000/900,000)*918,000 $36,720

2)-

The Correct Option Is Option-C i.e. $18,720

Particulars Amount
Face Value of bonds $900,000
Receipts Allocated to Bonds (864,000/900,000)*918,000 $881,280
Discount on Issue of Bond ($900,000-881,280) $18,720
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