Question

(Issuance of Bonds with Warrants) Illiad Inc. has decided to raise additional capital by issuing \(170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each \)100 bond sold. The value of the bonds without the warrants is considered to be \(136,000, and the value of the warrants in the market is \)24,000. The bonds sold in the market at issuance for $152,000.

Instructions

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

(b) If the warrants were nondetachable, would the entries be different? Discuss.

Short answer

1. Cash debited by $152,000, discount on bonds payable debited by $40,800, bond payable credited by $170,000 and paid-in capital stock warrants credited by $22,800.
2. Cash debited by $152,000, discount on bond payable debited by $18,000 and bond payable credited by $170,000.

The paid-in capital of the stock warrants is $22,800.

Step-by-step solution

Entry for the issue on the bonds

Date	Particulars	Debit	Credit
	Cash	$152,000
	Discount on Bonds Payable	$40,800
	Bonds Payable		$170,000
	Paid-in Capital Stock Warrants		$22,800
	(Being entry is made for the issuance of the bonds and warrants)

Paid-in capital of stock warrants:

$\begin{array}{rcl}\mathrm{Paid}-\mathrm{in}\mathrm{Capital}& =& \frac{\mathrm{Sales}\mathrm{Values}\mathrm{of}\mathrm{bonds}}{(\mathrm{Value}\mathrm{of}\mathrm{bonds}+\mathrm{Value}\mathrm{of}\mathrm{Warrants})}\times \mathrm{value}\mathrm{of}\mathrm{warrants}\\ & =& \frac{\$152,000}{\left(\$136,000+\$24,000\right)}\times \$24,000\\ & =& \$22,800\end{array}$

Entry if bonds are nondetachable

Date	Particulars	Debit	Credit
	Cash	$152,000
	Discount on Bonds Payable	$18,000
	Bonds Payable		$170,000
	(being entry if warrants are nondetachable)