On August 1, year 1, Perfect Communications issued $35 million of 12% nonconvert

Question

On August 1, year 1, Perfect Communications issued $35 million of 12% nonconvertible bonds at 105. The bonds are due on July 31, year 20. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $58, one share of Perfect Communications, no par common stock. International Containers purchased 25% of the bond issue. On August 1, year 1, the market value of the common stock was $56 per share and the market value of each warrant was $9. In February year 12, when Perfect's common stock had a market price of $74 per share and the unamortized discount balance was $1.2 million, International Containers exercised the warrants it held. Required: Prepare the journal entries on August 1, year 1, to record (a) the issuance of the bonds by Perfect and (b) the investment by International. Prepare the journal entries for both Perfect and International in February year 12, to record the exercise of the warrants.

Explanation / Answer

1) Perfect (Issuer) a. To record the issuance of the bonds by Perfect Cash(105% x $35 million) $36,750,000.00 Discount on bonds payable (difference) $4,550,000.00 Bonds Payable (Par value) $35,000,000.00 Equity—stock warrants (700,000 x $9) $6,300,000.00 # of bonds: $35,000,000 / $1,000 35,000 Bonds # of warrants: 35,000 bonds * 20 warrants per bond 700,000 Warants International (Investor) Investment by International Investment in stock warrants ($6,300,000 × 25%) $1,575,000.00 Investment in bonds (25% × $35 million) $8,750,000.00 Cash (25% × 35,000 × 20 warrants × $58) $10,150,000.00 Discount on bonds (difference) $175,000.00 2) To record in year 12 when the warrants are exercised Perfect (Issuer) Cash(25% x 700,000 warrants x $58) $10,150,000.00 Equity—stock warrants ($6.3 million x 25%) $1,575,000.00 Common Stock $11,725,000.00 International (Investor) Investment in Common Stock $11,725,000.00 Cash(25% x 700,000 warrants x $58) $10,150,000.00 Investment in stock warrants ($6.3 million x 25%) $1,575,000.00

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