2nd Edition

ISBN: 9780134730370

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

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Chapter 14, Problem 2SSC

Surfing the Standards Case 2: Bonds with Detachable Warrants

Companies sometimes issue bonds with detachable warrants entitling the bondholder to buy the stock of the company at a fixed price. The U.S. GAAP rules related to the issue of these bonds are included in ASC 470-20, Debt with Conversion and Other Options. Read paragraphs 2 and 3 of section 5, paragraphs 2 and 3 of section 25, and paragraphs 1 and 2 of section 30.

1. Why do companies sometimes issue bonds with detachable warrants?
2. Does U.S. GAAP treat bonds with detachable warrants as debt or equity?
3. How are the proceeds of the issue allocated to the financial statement components?

Doxy, Inc. issued $1,000,000 par value, 5%, 10-year bonds with detachable warrants on April 1 for $1,100,000 (April 1 is also the commitment date.) Interest is payable quarterly at the end of each quarter. Doxy can reliably determine that the market rate of interest that would be applicable to the bond issue without warrants is 6%. It can also reliably determine that the fair value of the warrants, if they were detached from the bonds would be $200,000.

4. Provide the journal entry to record the issuance on April 1.
5. Provide the journal entry to record the first interest payment on June 30.

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Chapter 14, Problem 1SSC

Chapter 14, Problem 1BCC

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(Warrants Issued with Bonds and Convertible Bonds) Incurring long-term debt with an arrangement whereby lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding is a frequent corporate financing practice. In some situations, the result is achieved through the issuance of convertible bonds; in others, the debt instruments and the warrants to buy stock are separate.Instructions(a) (1) Describe the differences that exist in current accounting for original proceeds of the issuance of convertible bonds and of debt instruments with separate warrants to purchase common stock.(2) Discuss the underlying rationale for the differences described in (a)(1) above.(3) Summarize the arguments that have been presented in favor of accounting for convertible bonds in the same manner as accounting for debt with separate warrants.(b) At the start of the year, Huish Company issued $18,000,000 of 12% bonds along with detachable warrants to buy 1,200,000 shares…

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Chapter 14 Solutions

Intermediate Accounting (2nd Edition)

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