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 Topic: Bond payable- how do I identify? ( Topic Closed)
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Godgift
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| Posted: 12 Apr 2011 at 15:56 | IP Logged
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Problem: On December 30, 2010, Fort, Inc. Issued 1,000 of it's 8%,
ten year, $1,000 face value bonds with detachable stock warrant per
year. Each bond carried a detachable warrant for one share of Fort's
common stock at a specified option price of $25 per 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, 2010 balance sheet, what amount
should Fort report as bond payable?
A) $1,000,000
B) $975,000
C) $900,000
D) $880,000
Answer is C but I taught is A based on the below journal entry:
Dr cash 1,000,000
Dr bond discount 100,000
Cr warrants APIC 100,000
Cr bonds payable 1,000,000
I know how they got the answer but I will like an explanation on how
to differentiate between the bond payable of 1,000,000 vs 900,000
when asked in the exam
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Zeratul
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| Posted: 13 Apr 2011 at 06:21 | IP Logged
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If you review your materials you will understand this question better. Specifically, when bonds are sold with detachable warrants, and both have separate fair market value, you have to use proportions to determine the individual book value of each.
Bond weight: 1,080,000/(1,080,000+120,000)=90%
Warrant weight: 120,000+(1,080,000+120,000)=10%
90%*1,000,000 (proceeds of bond issuance)=900,000 assigned to BP
The entry would be as follows:
Cash DR 1,000,000
Warrants APIC CR 100,000
Bonds Payable CR 900,000
There is no bond discount/premium because the bonds were sold at par.
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Godgift
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| Posted: 13 Apr 2011 at 09:10 | IP Logged
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Thank you so if the bond is not issue at par, is it ok to say that my
above journal entry is correct? Pls advise.
Zeratul wrote:
If you review your materials you will understand this question better.
Specifically, when bonds are sold with detachable warrants, and both
have separate fair market value, you have to use proportions to
determine the individual book value of each.Bond weight:
1,080,000/(1,080,000+120,000)=90%Warrant weight:
120,000+(1,080,000+120,000)=10%90%*1,000,000 (proceeds of bond
issuance)=900,000 assigned to BPThe entry would be as follows:Cash
DR 1,000,000Warrants APIC CR 100,000Bonds Payable CR
900,000There is no bond discount/premium because the bonds were
sold at par. |
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Zeratul
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| Posted: 14 Apr 2011 at 09:17 | IP Logged
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Yes.
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Godgift
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| Posted: 14 Apr 2011 at 15:02 | IP Logged
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Zeratul wrote:
Yes.
Thank you n I took ur advise to review my notes and I can now put the
pieces together.
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