[wishiwasaCPA]

On December 30, Year 1, Fort, Inc issued 1,000 of its 8% 10 year $1,000 face value bonds with detachable warrants at par. 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 its December 31, Year 1, balance sheet, what amount should Fort report as bonds payable?

The answer is:

DR: Cash $1,000,000

DR: Discount $100,000

CR: Paid-in-capital, warrants $100,000

CR: Bonds payable $1,000,000

Why aren’t the warrant recorded at $120,000? My answer key computes it as 120,000/(1,080,000+120,000) = 10%, and 10% times 1,000,000 = 100,000. I feel like its just taking random numbers, throwing them together, and getting 100k out of nowhere then putting it as the answer. I was hoping someone could explain the journal entry and what in the world the translation of that calculation is?

[Anonymous]

my dear friend, the answer is very easy in case you have read the concept, remember accounting isn't a rocket science, it'a just concepts and calculations. the rule is when the bond and the warranties value are known, you have to allocate the cash received to the bond and the warranties based on their relative fair value.

– cash proceeds 1M

-Total Bond and warranties FV 1.2 M

-Warranties relative Value 120K/1.2M=10%

– Warranties values = Cash proceeds (1M) * 10% = 100K

– same calculations is valid for the bond value.

– Hint, for the borrower ALWAYS RECORD THE BOND PAYABLE WITH THE FACE VALUE, ADJUST THE PROCEEDS BY PREMIUM OR DISCOUNT, in our case here the bond face 1M and the Bond relative Value is 900K, so the bond was issued at a discount of 100K.

My advice is, don't rush to answer questions before you study the material and knowing the concept.

all the best..

[Anonymous]

my dear friend, the answer is very easy in case you have read the concept, remember accounting isn't a rocket science, it'a just concepts and calculations. the rule is when the bond and the warranties value are known, you have to allocate the cash received to the bond and the warranties based on their relative fair value.

– cash proceeds 1M

-Total Bond and warranties FV 1.2 M

-Warranties relative Value 120K/1.2M=10%

– Warranties values = Cash proceeds (1M) * 10% = 100K

– same calculations is valid for the bond value.

– Hint, for the borrower ALWAYS RECORD THE BOND PAYABLE WITH THE FACE VALUE, ADJUST THE PROCEEDS BY PREMIUM OR DISCOUNT, in our case here the bond face 1M and the Bond relative Value is 900K, so the bond was issued at a discount of 100K.

My advice is, don't rush to answer questions before you study the material and knowing the concept.

all the best..

[Author]

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