Question

P Inc. has decided to raise additional capital by issuing $178,000 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 $120,800, and the value of the warrants in the market is $30,200. The bonds sold in the market at issuance for $162,000.

(a) What entry should be made at the time of the issuance of the bonds and warrants? (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to 0 decimal places, e.g. 5,125.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

(b1) Prepare the entry if the warrants were nondetachable. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to 0 decimal places, e.g. 5,125.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Answer 1

Market value of bonds	120800
Market value of warrants	30200
Total market value	151000
Allocated to bonds	129600		=162000*120800/151000
Allocated to warrants	32400		=162000*30200/151000
a
Account Titles and Explanation	Debit	Credit
Cash	162000
Discount on Bonds payable	48400
Bonds payable		178000
Paid in Capital-Stock Warrants		32400
b
Account Titles and Explanation	Debit	Credit
Cash	162000
Discount on Bonds payable	16000
Bonds payable		178000