Question

On April 1, Year 1, Ward Corp. issued $750,000 of 10% nonconvertible bonds at 102 that are due on March 31, Year 11. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholder to purchase one share of Ward $10 par common stock for $25. On April 1, Year 1, the market value of Ward's common stock was $20 per share, and the market value of each warrant was $4. What amount of the proceeds from the bond issue should Ward record as an increase in stockholders' equity?

A. 15,000

B. 120,000

C. 300,000

D. 750,000

The correct answer is B but I'm not sure how to work the problem to get that answer.

Answer 1

Solution:

The Answer is B) $ 120,000.

Explanation:

Amount of proceeds from bond issue should ward record as increase in stockholders` equity is as follows:

1) In this bonds issue, there are two things one is bond issue and second is stock warrants.

2) Bond Issue proceeds are added to bonds payable account which comes under long term liabilities.

3) Stock Warrant proceeds are added to stockholders` equity. Calculation is as follows:

No. of Stock Warrant * Market Value of Warrant = 30,000 Warrants * $ 4 per warrant = $ 120,000

4) Calculation of Stock Warrant = 40 Stock warrant per bond issue

= ( Total Bonus Issue Value / Value per bond ) * Warrants per bond

= ( $ 750,000 / $ 1000 per bond ) * 40 = 30,000 Warrants