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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 1, 2019, Conroe Corporation sold $500,000 of 13% bonds at 107. Each $1,000 bond carried 20 warrants, and each warrant allowed the holder to acquire one share of $10 par value common stock for $20 per share. Subsequent to the issuance of the securities, the bonds were quoted at 102 ex rights, and the warrants were quoted at $4 each.

Required:

  1. 1. Determine the value to be assigned to the bonds and the warrants and prepare the journal entry to record the issuance of the convertible bonds.
  2. 2. Assume that 4,000 warrants are subsequently exercised on July 1, 2021. Prepare the journal entry for the issuance of the common stock.

1.

To determine

Calculate the value to be assigned to the bonds and the warrants, and prepare journal entry to record the issuance of convertible bonds.

Explanation

Detachable Stock Purchase Warrants:

A stock warrant gives the buyer an option to acquire a declared number of shares of common stock at a specific option price within a particular time period.

Calculate the value assigned to the bonds and the warrants.

Calculate the value assigned to the bonds.

Value assigned to bonds) =Market value of bonds without warrants(Market value of bonds without warrants + Market value of warrants)×Issuance price=([102ex rights×10Warrants]×$500,000$1,000)([102ex rights×10Warrants]×$500,000$1,000)+($4×$500,000$1,000×20Warrants)×$535,000=($1,020×500)($1,020×500)+($4×500×20)×$535,000=$496,091

Therefore, value assigned to bonds amount is $496,091.

Calculate the value assigned to the warrants

2.

To determine

Prepare journal entry to record issuance of common stock; assume 4,000 warrants are subsequently exercised on 1st July 2021.

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