Question

Use the following information to answer the next two questions:

On May 1, 2014, Payne Co issued 900, $1,000 bonds (total of $900,000) paying interest at 7% at 103 which are due in 10 years. Each bond has 20 detachable stock warrants (18,000 total stock warrants) that entitled the holder to purchase for $40 one share of $15 par value common stock.

The bonds without the warrants were selling at 96 and the warrants were selling for $2 each. The market value of the common stock was $35 per share on May 1.

On May 1, 2014 how much should Payne credit Paid-in Capital from Stock Warrants for?

$34,560

$36,000

$37,080

$63,000

On May 1, 2014, Payne should record the bonds with a:

discount of $36,000

discount of $10,080

discount of $9,000

premium of $27,000

Answer 1

Solution:

Bond issuance price: $900,000 x 1.03 = $927,000
Fair market value of bonds without warrants: $900,000 x 96% = $864,000
Fair market value of warrants: 18000 x $2 = 36,000
Total fair market value = $900,000
Allocated to bonds (927,000 / 900,000) x 864,000 = $889,920
Allocated to warrants (927,000 / 900,000) x 36,000 = $37,080

Payne credit Paid-in Capital from Stock Warrants for $37,080

Hence 3rd option is correct.

Payne should record bond with discount of $10,080

Hence 2nd option is correct.