On August 1, 2018, Limbaugh Communications issued $22 million of 11% nonconverti

Question

On August 1, 2018, Limbaugh Communications issued $22 million of 11% nonconvertible bonds at 105. The bonds are due on July 31, 2038. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of Limbaugh Communications’ no par common stock. Interstate Containers purchased 20% of the bond issue. On August 1, 2018, the market value of the common stock was $48 per share and the market value of each warrant was $10.

In February 2029, when Limbaugh’s common stock had a market price of $62 per share and the unamortized discount balance was $2 million, Interstate Containers exercised the warrants it held.

Required:

1. Prepare the journal entries on August 1, 2018, to record (a) the issuance of the bonds by Limbaugh and (b) the investment by Interstate.
2. Prepare the journal entries for both Limbaugh and Interstate in February 2029, to record the exercise of the warrants.

Explanation / Answer

Answer

1.

The journal entries on August 1, 2018, to record (a) the issuance of the bonds by Limbaugh and (b) the investment by Interstate:

of bonds: $22,000,000 / $1,000 = 30,000 bonds

of warrants: 30,000 bonds * 40 warrants per bond = 1,200,000 warrants

2..

The journal entries for both Limbaugh and Interstate in February 2029, to record the exercise of the warrants:

Date Particulars Dr Cr August 1, 2018 Cash (105% x $22 million) 23,100,000 Discount on bonds payable 10,900,000 Bonds payable (face amount) .. 22,000,000 Equity—stock warrants ($10*1,200,000 warrants) 12,000,000

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