Question

TR15-7 Warrants (LO 15-5) Shurwood Ltd. issued 5,000,000 8%, 10-year, nonconvertible bonds with detachable warrants for...

TR15-7 Warrants (LO 15-5)

Shurwood Ltd. issued 5,000,000 8%, 10-year, nonconvertible bonds with detachable warrants for $5,100,000. Shortly after issuance, the warrants trade for $300,000 in total, and the bonds were trading at 99, or $4,950,000, ex-warrants (i.e., without warrants attached).

Required:
1. Provide the journal entry to record the transactions. (Round the intermediate calculations to one decimal place and Round the final answers to nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)


2. Provide the journal entry to record the first payment of interest on the convertible bond assuming that the bonds pay interest annually. Effective interest rate is 8.58%. (Round percent answers to two decimal places of percentage and Round the final answers to nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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Answer #1

1. Journal entry to record the transaction  -

Account name Debit Credit
Bank account 5000000
8% non convertible bonds 4950000
Share premium 50000

2. Journal entry to record the first payment of interest -

Account name Debit Credit
Interest expense 424710
8% non convertible bonds 24710
Bank 400000
Current value 4950000
Interest payment = Present Value of Liability * Market Rate of Interest
= 4950000*8.58%
424710
Actual interest payment = 5000000*8%
400000
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