Marigold Inc. has decided to raise additional capital by issuing $185,000 face v

Question

Marigold Inc. has decided to raise additional capital by issuing $185,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $126,400, and the value of the warrants in the market is $31,600. The bonds sold in the market at issuance for $150,000 (a) What entry should be made at the time of the issuance of the bonds and warrants? (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to O decimal places, e.g. 5,125.) Account Titles and Explanation Debit Credit (b1) Prepare the entry if the warrants were nondetachable. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to O decimal places, e.g. 5,125.) Account Titles and Explanation Debit Credit

Explanation / Answer

SOLUTION

Value assigned to bonds =

= Value of bonds without warrants / (Value of bonds without warrants + Value of warrants) * Issue price

= $126,400 / ($126,400 + $31,600) * $150,000

= $126,400 / $158,000 * $150,000

= $120,000

Value assigned to warrants =

= Value of warrants / (Value of bonds without warrants + Value of warrants) * Issue price

= $31,600 / ($126,400 + $31,600) * $150,000

= $31,600 / $158,000 * $150,000

= $30,000

Journal Entries

S.No. Accounts title and Explanation Debit ($) Credit ($) 1. Cash 150,000 Discount on bonds payable ($185,000 - $120,000) 65,000 Bonds payable 185,000 Paid in capital- stock warrant 30,000 2. Cash 150,000 Discounts on bonds payable 35,000 Bonds payable 185,000 (If warrants are non detacheable)

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