On August 1, 2016 Comenius Corporation issued $10 million of 8% bonds at a price

Question

On August 1, 2016 Comenius Corporation issued $10 million of 8% bonds at a price of 105. The bonds mature in 20 years. Each bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of Comenius Corporation’s $5 par common stock. United Brethren Corporation purchased 10% of the bond issue. On August 1, 2016, the market value per share for Comenius Corporation stock was $56 and the market value of each warrant was $6. In March 2023, when Comenius Corporation stock had a market price of $70 per share and the unamortized premium balance was $300,000, World exercised the warrants it held.

Required:

1. Prepare the journal entries on August 1, 2016, to record (A) the issuance of the bonds by Comenius Corporation and (B) the investment by United Brethren Corporation.

2. Prepare the journal entries for both companies in March 2023 to record the exercise of the warrants by United Brethren Corporation. (Comenius Corporation 100%, United Brethren Corporation 10%)

Explanation / Answer

1) a) Issuance of the bonds in $ millions Discriptiption Debit Credit Cash ($10 million x 105%) $10.5 Discount on bonds payable (to balance) $0.7 Bonds payable (face amount) $10 Ordinary Share warrants $1.2 $6 mv x 20 warrants x ($10,000,000/1000)bonds b) Investment by United Brethren Corporation Investment in stock warrant ($1.2 x 10%) $0.12 Investment in Bonds Payable($10 x 10%) $1 Discount on bonds $0.07 Cash ($10 million x 105% x 10%) $1.05 2) Exercise of Stock Warrants Comenius Corporation issuer Cash(10% x $10,000,000/1000 bonds x $70 x 20 warrants) $1.4 Ordinary Share Warrants ($1.2 x 10%) $0.12 Common stock (to balance) $1.52 United Brethren Corporation(Investor) Investment in common stock (to balance) $1.52 Investment in stock warrant ($1.2 x 10%) $0.12 Cash(10% x $10,000,000/1000 bonds x $70 x 20 warrants) $1.4

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