Question

24.25

The below information will be used for the next two questions.

A Company issued a bond payable with detachable warrants on the interest payment date as follows.

Bond payable ($1,000 par value; 400 bonds)	$400,000
Coupon rate	4.70%
Bond issue price	$414,000
Fair value of the bonds after issuance	$390,000
Term	10 years
Number of detachable warrants per bond	50
Fair value of the warrants after issuance	$2.00
Stock purchase price	$15.00
Warrants exercised	5,000

1 warrant = 1 share of $1 par value stock

1.

What is interest expense in 20X1?

2.

1 warrant = 1 share of $1 par value stock

What is the credit to additional paid in capital at the time the warrants are exercised on June 30, 20X1?

Answer 1

Answer:          
          
1) Interest Expense for the year:          
          
   Par Value of Bonds issued      =   $4,00,000
   Coupon Rate                           =      4.70%
   Interest Expense for the year =   $400,000 * 4.70%
          =   $18,800

2) Credit to Additional paid in capital on exercise of warrants:

    a) Journal Entry when bonds(with detachable warrants) are issued - Market Value Method
                        

Cash A/c	$              414,000
Discount on Bonds payable A/c *	$                   24,512
To Bonds payable A/c		$      400,000
To APIC-warrants A/c **		$          38,512

* Balancing figure

** Fair value of the bonds = $ 390,000

   Fair Value of Warrants   = $ 40,000

    (400 bonds * 50 warrants * $2)

APIC-Warrants = Price of bonds * (FV of warrants)/(FV of warrants+FV of bonds)

                           = 414,000 * 40000/(40000+390,000)

                           = $ 38,512

b) Entry on exercise of 5000 warrants @ $15

        Given 1 warrant = 1 share of $1 par value

        Therefore 5000 warrants                 = 5000 shares

        Total detachable Warrants issued    = 400 bonds * 50 each

= 20,000

Cash A/c (5000 shares * $15 )		$                   75,000
APIC-warrants A/c ($38512 * 5000/20000)		$                     9,628
To common stock A/c (5000 shares * $1)			$            5,000
To APIC A/c			$          79,628

     Therefore,

Credit to Additional paid in capital account at the time of exercise of warrants = $ 79,628