On Sep 1st, 2005,Castle issued for $ 530,000 cash, 500 7% five year non convertible bonds dated September 1, 2005. Each bond had a detachable stock purchase warrant to purchase 20 shares of $ 3 par value stock for $10 per share. Immediatley after the issuance, the warrants had a market value of $ 45,000 and the bonds were selling at 102 without the warrants.

Can anyone explain the JE for the issuance of bonds with detachable warrants on Sep 1 2005.

Thanks

Hi FutureCPA,

As you can see based on your question

Bond Issue: 530000 (Given)
Face Value: 500000 (Given)
Market Value of Bonds: 510000 (500000 x 1.02)
Market Value of Warrants: 45000 (Given)

The Market Value of the Bonds and Warrants are given therefore you would need to use the Market Value Method.  If the market value of bonds is not given, you would need to use the Book Value Method, which is basically recording APIC-Warrants at the MV of the Warrants.

First, You would need to total the Market Value 510000 + 45000 = 555000

Determine the % allocation for the Warrants: 45000 / 555000 = 8.11%
Multiply the % against the Bond Issue price: 530000 x 8.11% = 42973

That's the number you would need to credit for APIC-Warrants.

Journal Entry:

Cash        530000
Discount     12973
      Bonds Payable      500000
      APIC-Warrants       42973

Hope this helps and Good luck =)

Espy,

How do you arrive at the Face Value: 500000 (Given)? It is not given in the question. You just assume the face value per bond is $100 and then multiply it by 500 (the number of bonds)?

I think you mis-typed your post and entered $100.

generally $1,000 per bond...

Yes, it should be $1000. But how did you get the number which is not indicated in the question?