On May 1, 2014, Payne Co. issued $900,000 of 7% bonds at 103, which are due on A

Question

On May 1, 2014, Payne Co. issued $900,000 of 7% bonds at 103, which are due on April 30, 2024. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne’s common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2014, the fair value of Payne’s common stock was $35 per share and of the warrants was $2. On May 1, 2014, Payne should record the bonds with a

discount of $36,000.

discount of $10,080.

discount of $ 9,000.

premium of $27,000.

Please explain how the calculation of $10,080 was achieved and a detail explanation

Explanation / Answer

Issue price of bonds with warrants = $900,000 * 103/100 = $927,000

Price of bonds without warrants = $900,000 * 96/100 = $864000

Issue price of bond without warrants = $927000 * ($864,000 / $900,000) = $889,920

Par value of bonds = $900,000

Discount on issue of bonds = $900,000 - $889,820 = $10,080

Hence, answer is Discount of $10,080

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