Brief Exercise 16-5 Your answer is partially correct. Try again. Flint Corporati

Question

Brief Exercise 16-5 Your answer is partially correct. Try again. Flint Corporation issued 1,850 $1,000 bonds at 103. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling separately at 99. The market price of the warrants without the bonds cannot be determined. Use the incremental method to record 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 O for the amounts.) Accoues Tules and Explenatien lat Stack Question Attemptsi 1 of G used AV FoR LATER

Explanation / Answer

Hi,

In this case we are using Incremental method for recording bond issue alongwith detachable warrants.

Under this method, the security, fair value of which is known is used as basis and is deducted from total issue proceeds to find fair value of other security which is unknown. In the current example, $1,000 bonds are selling separately at 99% par. However, market value of warrants without bonds cannot be determined.

So, under incremental method fair value of bonds will be deducted from total proceeds and remainder will be allocated to warrents as follows,

Total proceeds = 1,850 units * $1,000 * 103% = $1,905,500

Fair value of bonds = 1,850 units * $1,000 * 99% = $1,831,500

hence fair value of warrants = $1,905,500 - $1,831,500 = $74,000

To record this following entry will be required;

Cash (Total proceeds) Dr. $1,905,500

Discount on Bonds Payable (Book value - fair value) Dr. $18,500

(1,850 units * $1,000 * 100%) - (1,850 units * $1,000 * 99%)

Bonds Payable (Book value) $1,850,000

Paid in Capital - Stock Warrants (Fair value of warrants) $74,000

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