On December 30, 1992, Fort issued 1,000 of its 8%, 10-year, $1,000 face value bonds  with detachable warrants at par. Each Bond carried a detachable warrant for one share of Fort's common stock at a specified price of $25/share. Immediately after issuance, the market value of the bonds without the warrants was $1,080,000 and the market value of the warrants was $120,000. In it's December 31, 1992 Balance sheet, what should fox report as bonds payable

Answer = $900,000

Cash 1,000,000

Discount 100,000

         PIC-Warrants 100,000

         Bonds payable 1,000,000

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I don't see why the warrants are valued at 100,000 in this answer. I thought that warrants should be credited at their fair value, the 120,000. which would create a bond payable of $880,000

Thanks in advance!

hi,

there are 2 methods with detachable stk warrants.One is Market related value where market price of both bonds and  warrants are given like in u r question.

And other one is warrnats only method where only warrants market value is given.

So now with market value available for both bonds and warrants u have to allocate the proceeds according to their relative market ratio.

Bonds = 1,080,000 /1,080,000 + 120,000 = 90%

And then allocate 90% of cash proceeds to bonds (900,000) and 10% to warrants(100,000).

Hope this helps.

Thanks for the clarification meghna!

So basically, you assume to use Market Method when market value of both bond and warrant is given in the example??

Thanks!! :)

I think this is a good example of the warrants only method, am I right?

On 12/31/09, Moss Co. issued $1,000,000 of 11% bonds at 109.  Each $1,000 bond was issued with fifty detachable stock warrants, each of which entitled the bond holder to purchase one share of $5 par common stock for $25.  Immediately after issuance, the market value of each warrant was $4.  On 12/31/09, what amount should Moss record as discount or premium on issuance of bonds?

Answer is $110,000 discount.  Computed as:

1,000 bonds * 50 warrants = 50,000 total warrants

50,000 warrants * $4 market value = $200,000 market value warrants

$1,000,000 face bond * 1.09 cost = $1,090,000

$1,090,000 - $200,000 = $890,000 bond value

$1,000,000 - $890,000 = $110,000 discount

Sorry, I know no one asked for that, but it helped me to type it out. :)