Concept explainers
Bonds with detachable warrants
• LO14–5
On August 1, 2018, Limbaugh Communications issued $30 million of 10% nonconvertible bonds at 104. The bonds are due on July 31, 2038. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $60, one share of Limbaugh Communications’ no par common stock. Interstate Containers purchased 20% of the bond issue. On August 1, 2018, the market value of the common stock was $58 per share and the market value of each warrant was $8.
In February 2029, when Limbaugh’s common stock had a market price of $72 per share and the unamortized discount balance was $1 million, Interstate Containers exercised the warrants it held.
Required:
1. Prepare the
2. Prepare the journal entries for both Limbaugh and Interstate in February 2029, to record the exercise of the warrants.
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Chapter 14 Solutions
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- € 17.4 (L01) (Debt Investments) Assume the same information as in E17.3 (in the picture)except that Roosevelt has an active trading strategy for these bonds. The fair value of the bonds at December 31 of each year end is as follows. 2019 $ 534.200 2020 $ 515,000 2021 $ 513,000 2022 $ 517,000 2023 $ 500,000 Instructions a. Prepare the journal entry at the date of the bond purchase. b. Prepare the journal entries to record the interest received and recognition of fair value for 2019. c. Prepare the journal entry to record the recognition of fair value for 2020. d. Discuss how the response to (c) will be different assuming Roosevelt has a strategy of held-for-collection and selling.arrow_forwardQ#9 On June 30, 2021, Singleton Computers issued 5% stated rate bonds with a face amount of $280 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 4% (2.0% semiannual rate). Interest is paid semiannually (2.5%) on June 30 and December 31, beginning on December 31, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)Required:1. Determine the price of the bonds on June 30, 2021.2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method. 1. Table values are based on: n = i = Cash Flow Amount Present Value Interest Principal Price of bondsarrow_forwardPB6. LO 13.3Edward Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable semiannually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. July 1, 2018: entry to record issuing the bonds Dec. 31, 2018: entry to record payment of interest to bondholders Dec. 31, 2018: entry to record amortization of discountarrow_forward
- PB5. LO 13.3Dixon Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable annually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. July 1, 2018: entry to record issuing the bonds June 30, 2019: entry to record payment of interest to bondholders June 30, 2019: entry to record amortization of discount June 30, 2020: entry to record payment of interest to bondholders June 30, 2020: entry to record amortization of discountarrow_forwardsh2 Universal Foods issued 8% bonds, dated January 1, with a face amount of $160 million on January 1, 2024. The bonds mature on December 31, 2038 (15 years). The market rate of interest for similar issues was 10%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. Required: 1. Determine the price of the bonds at January 1, 2024. 2. to 4. Prepare the journal entries to record their issuance by Universal Foods on January 1, 2024, interest on June 30, 2024 and interest on December 31, 2031.arrow_forwardExercise 12-11 (Algo) Available-for-sale securities [LO12-1, 12-4] Mills Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $320 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $300 million. Required:1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.3. At what amount will Mills report its investment in the December 31, 2021, balance sheet?4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $330 million. Prepare the journal…arrow_forward
- EA6. LO 13.2 Oak Branch Inc. issued $700,000 of 5%, 10-year bonds when the market rate was 4%. They received $757,243. Interest was paid semi-annually. Prepare an amortization table for the first three years of the bonds. Cash Interest Payment Rate 0.025 Interest on Carrying Value Rate 0.02 Amortization of Premium Carrying Value Jan. 1, Year 1 757,243 June 30, Year 1 Dec. 31, Year 1 June 30, Year 2 Dec. 31, Year 2 June 30, Year 3 Dec. 31, Year 3arrow_forward24.1 On July 1, 2022, NC called for redemption of all of its P2,000,000 faces amounts bonds payable outstanding at the call price of 102. As of June 30, 2022, the unamortized discount was P90,000, and the unamortized bond issue costs were P45,800. The market value of the bonds was P2,020,300 on July 1, 2022. NC’s effective income tax rate was 30% for 2022. In its income statement for the year ended December 31, 2022, what amount should NC report as loss from bond redemption?arrow_forwardE 16.3 Flynn Company purchased 70 Rinehart Company 6%, 10-year, $1,000 bonds on January 1, 2020, for $70,000. The bonds pay interest annually on January 1. On January 1, 2021, after receipt of interest, Flynn Company sold 40 of the bonds for $38,500. Instructions Prepare the journal entries to record the transactions described above.arrow_forward
- E16.7 (LO 1, 2) (Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry or entries required to record each transaction. 1. Coyle SA issued €10,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company's investment banker determines that they would have been sold at 95. 2. Lambert AG issued €10,000,000 par value 10% bonds at 98. One share warrant was issued with each €100 par value bond. The net present value of the bonds without the warrants was €9,600,000. 3. Sepracor AG called its convertible debt in 2022. Assume the following related to the transaction. The 11%, €10,000,000 par value bonds were converted into 1,000,000 shares of €1 par value ordinary shares on July 1, 2022. The carrying amount of the debt on July 1 was €9,700,000. The Share Premium-Conversion Equity account had a balance of €200,000, and the company paid an additional €75,000 to the bondholders to induce conversion of all…arrow_forwardPROBLEM 2: On January 1, 2020, Baymax Company purchased Mad Max Corporation, P1,000,000 12% bonds for P1,065,000, a price that yields 10%. The bonds pay interest semi-annually every January 1 and July 1 and they mature on January 1, 2024. At December 31, 2020, each P1,000,000 bond is selling at P1,055.42. A) Assuming that the securities are classified as debt investments at amortized cost, what is the carrying amount of the debt investment reported on December 31, 2020 statement of financial position? a) 1,000,000 b) 1,051,163 c) 1,055,000 d) 1,065,000 B) Assuming that the securities are classified as debt investments at fair value though profit or loss, what is the carrying amount of the debt investment reported on December 31, 2020 statement of financial position? a) 1,000,000 b) 1,051,163 c) 1,055,000 d) 1,065,000 C) Assuming that the securities are classified as debt investments at fair value through profit or loss, what is the interest revenue from the bond investment for…arrow_forwardProblem 7-14 On December 31,2020, Cey Company had outstanding 12% P5,000,000 face amount convertible bonds maturing on December 31,2025. Intereset is payable on June 30 and December 31. Each P1,000 bond is convertible into 50 shares of Cey Company with P10 par value. On December 31,2020, the unamortized balance in the premium on bonds payable account was P300,000. No equity component was recognized from the original issuance of the convertible bonds. On December 31,2020, 2,000 bonds were converted when the share had a market price of P24. The entity incurrd P20,000 in connection with the bond conversion. 1. What is the share premium arising from the bond conversion? A. 1,400,000 B. 1,100,000 C. 1,380,000 D. 1,120,000arrow_forward
- Corporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning