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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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When the cash proceeds from a bond issued with detachable stock purchase warrants exceed the sum of the par value of the bonds and the fair value of the warrants, the excess should be credited to:

  1. a. Additional Paid-in Capital
  2. b. Retained Earnings
  3. c. Premium on Bonds Payable
  4. d. Detachable Stock Warrants Outstanding

To determine

Identify the option that must be credited if the detachable stock purchase warrants exceeds the sum of the par value of the bonds and the fair value of the warrants.

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.

Justification for the incorrect options of a, b and d:

Additional paid-in capital, retained earnings and detachable stock warrants outstanding accounts are not credited if the detachable stock purchase warrants exceeds the sum of the par value of the bonds and the fair value of the warrants. Therefore, these are incorrect options.

Justification for the correct option c:

  • In order to increase the marketability of bonds, company issues bond with “detachable stock warrants”. Such warrants permit their holders to acquire common stock at a pre-determined price without surrendering their debt securities.
  • The “bonds and the detachable warrants” are each reported at an amount depending upon the allocation of a part of the proceeds from the issue...

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