Question

(Issuance of Bonds with Detachable Warrants) On September 1, 2017, Sands Company sold at 104 (plus accrued interest) 4,000 of its 9%, 10-year, \(1,000 face value, nonconvertible bonds with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common stock at a specified option price of \)15 per share. Shortly after issuance, the warrants were quoted on the market for \(3 each. No fair value can be determined for the Sands Company bonds. Interest is payable on December 1 and June 1. Bond issue costs of \)30,000 were incurred.

Prepare in general journal format the entry to record the issuance of the bonds

Short answer

Cash will be debited by $4,220,000, and Unamortized Bond Issue Costs will be credited by $30,000, Bonds Payable will be credited by $4,000,000, Premium on Bonds Payable will be credited by $136,000; Paid-in Capital—Stock Warrants will be credited by $24,000 and Interest Expense will be credited by $90,000.

Step-by-step solution

Journal entry

Date	Transactions	Debit	Credit
September 1, 2017	Cash ($4,160,000 + $90,000 − $30,000)	$4,220,000
	Unamortized Bond Issue Costs		$30,000
	Bonds Payable (4,000 X $1,000)		4,000,000
	Premium on Bonds Payablle		136,000
	Paid-in Capital—Stock Warrants		24,000
	Interest Expense		90,000
	(To record the issuance of the bonds)

Calculation of premium on bonds payable

Sales proceeds (4,000 X $1,040)	$4,160,000
Less: Face value of bonds	$4,000,000
Excess of funds over face value	$160,000
Deduct values of stock warrants  (4,000 X 2 = 8,000; 8,000 X $3)	24,000
Premium on bonds payable	$136,000

Calculation of accrued interest

Face value of bonds $4,000,000	$4,000,000
Interest rate	9%
Annual interest ($400,000 x 9%)	$360,000
Accrued interest for 3 months – ($360,000 X 3/12)	$90,000