Question

Incurring long-term debt with an arrangement whereby lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding is a frequent corporate financing practice. In some situations, the result is achieved through the issuance of convertible bonds; in others, the debt instruments and the warrants to buy stock are separate.

At the start of the year, Huish Company issued $ 18,000,000 of 12% bonds along with detachable warrants to buy 1,200,000 shares of its $10 par value common stock at $18 per share. The bonds mature over the next 10 years, starting one year from date of issuance, with annual maturities of $ 1,800,000. At the time, Huish had 9,600,000 shares of common stock outstanding. The company received $ 20,040,000 for the bonds and the warrants. For Huish Company, 12% was a relatively low borrowing rate. If offered alone, at this time, the bonds would have sold in the market at a 22% discount.

(b) Prepare the journal entry for the issuance of the bonds and warrants for the cash consideration received

Answer 1

Answer :-

(b) .Prepare the journal entry for the issuance of the bonds and warrants for the cash consideration received .

Account titles and explanation	Debit	Credit
Cash	$ 20,040,000
Discount on issue of bond	$3,960,000
Bonds payable		$18,000,000
Additional paid-in-capital		$6,000,000

Working notes :-

Discount on issue of bond = $ 18,000,000 * 22%

= $3,960,000

Discount on issue of bond = $3,960,000

Additional paid-in-capital = [ $ 20,040,000 + $3,960,000 ] - $18,000,000

= $24,000,000 - $18,000,000

Additional paid-in-capital = $6,000,000 .