On April 7, 2018, Waterway Industries sold a $5100000, twenty-year, 9 percent bo

Question

On April 7, 2018, Waterway Industries sold a $5100000, twenty-year, 9 percent bond issue for $5406000. Each $1000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation's common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation's securities had the following market values:

$1008

22

29

What accounts should Waterway credit to record the sale of the bonds? (rounded to the nearest dollar)

$5100000

306000

$5100000

79894

226106

$5100000

192947

113053

$5100000

47736

217464

$1008

22

29

Explanation / Answer

Waterway Industries has sold 9% Bond with detachable warrant of Face Value $5,100,000 for 20 Years for $5,406,000. Each of 1000 Bond has 2 detachable bonds, each of which allows the buyer to purchase one share of common stock at par value of 25$.

Now in the given problem there are two instrument one is Bond and other one being the detachable warrant which can be bought and sold on a standalone basis in the market. Hence the overall proceeds of 5,406,000 is not only for bond but also for detachable warrant. Prima facie it can be inferred that $306,000 (5,406,000-5,100,000) is the premium on Bond’s issued but 306,000 has value received for detachable warrant which we need to identify and account for.

Hence, we need to identify the allocation of $5,406,000 between the bond and to the warrants

No of Bond – $5,100,000/$1000 = 5,100

No of Warrant – 5,100*2 = 10,200.

Market Value of Warrant = 10,200*$22 = $224,000

Market Value of Bond Without Warrant = 5,100*$1008 = $5,140,000.

Total Market Value = $224,000 + $5,140,000 = $5,365,200

Allocation of Market Value

Bond = $5,406,000/$5,365,200*5,140,000 = $5,179,894 (Rounded off)

Warrant = $5,406,000/$5,365,200*$224,400 = $226,106(Rounded off)

So, Bond is issued at a premium but not at 306,000 but at 79,884 (Total Value received – Face Value of Bond – Market Value of Warrant)

Please refer below entry -

Cash Account Debit                                       $5,406,000

Bond Payable (Face Value) Credit $5,100,000

Paid In Capital – Stock Warrants Credit $226,106

Premium on Bonds Payable Credit $79,894

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.