Question

Crane Inc. has decided to raise additional capital by issuing $167,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $143,650, and the value of the warrants in the market is $25,350. The bonds sold in the market at issuance for $154,500.

(a) What entry should be made at the time of the issuance of the bonds and warrants?

(b) Prepare the entry if the warrants were nondetachable.

Answer 1

Market value of bonds	143650
Market value of warrants	25350
Total market value	169000
Allocated to bonds	131325		=154500*143650/169000
Allocated to warrants	23175		=154500*25350/169000
a
Account Titles and Explanation	Debit	Credit
Cash	154500
Discount on Bonds payable	35675
Bonds payable		167000
Paid in Capital-Stock Warrants		23175
b
Account Titles and Explanation	Debit	Credit
Cash	154500
Discount on Bonds payable	12500
Bonds payable		167000