Bonds with detachable warrants
Asked Apr 28, 2012, 03:35 PM
United Corporation decided to raise additional capital by issuing $ 170,000 face value of bonds with a coupon rate of 10%.in discussion with their investment bankers, it was determined that to help the sale of bonds,detachable stock warrants should be issued at the rate of one warrant for each 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 with stock warrants sold in the market at issuance for $152,000.
Each stock warrant can purchase two shares of United Corp.'s $ 2 par common stock at $ 40 per share.
1. Prepare journal entries at the time of the issuance of the bonds and warrants.
2. What entries should be made if all stock warrants are exercised when the stock price is $ 50 per share?
JE at issuance:
Discount on B/Payabe 40,800
Paid-in-capital in excess of par,SW 22,800
JE at exercise:
Cash ( $40* 170,000) 6.8 mil
Paid-in-capital-in-excess of par,SW 22,800
Common Stock 680,000
Paid-in-capital-in-excess of par,CS 6,142,800