Exercise 16-7 Crane Inc. has decided to raise additional capital by issuing $168

Question

Exercise 16-7

Crane Inc. has decided to raise additional capital by issuing $168,000 face value of bonds with a coupon rate of 9%. 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 $154,800, and the value of the warrants in the market is $17,200. The bonds sold in the market at issuance for $154,000.

(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 0 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 0 decimal places, e.g. 5,125.)

Account Titles and Explanation

Debit

Credit

Open Show Work

Account Titles and Explanation

Debit

Credit

Explanation / Answer

Answer a. Value Assigned to Bonds = (Value of Bonds without warrants / (Value of Bonds without warrants + Value of Warrants) X Issue Price Value Assigned to Bonds = ($154,800 / (154,800 + 17,200)) X $154000 Value Assigned to Bonds = $138,600 Value Assigned to Warrants = (Value of warrants / (Value of Bonds without warrants + Value of Warrants) X Issue Price Value Assigned to Warrants = ($17,200 / (154,800 + 17,200)) X $154000 Value Assigned to Warrants = $15,400 Journal Entry Date Particulars Dr. Amt Cr. Amt. 1 Cash    154,000.00 Discount on Issue of Bonds      29,400.00 $168,000 - $138,600    Bonds Payable    168,000.00    Paid-In Capital - Stock Warrants      15,400.00 (record the issue of Bonds with warrants) Answer b. Warrants are non-detachable In this case, separate recognition is not given to warrants. Journal Entry Date Particulars Dr. Amt Cr. Amt. 1 Cash    154,000.00 Discount on Issue of Bonds      14,000.00 $168,000 - $154,000    Bonds Payable    168,000.00 (record the issue of Bonds with non-detachable warrants)

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