[Anonymous]

This is a question from Becker’s FAR F-5. I was wondering, how did they get the bond discount? from the J/E, we only know Cash and Paid-in-capital- warrants. How do I get B/P without knowing the discount?

Thanks!!

On December 30, Year 1, Fort, Inc. issued 1,000 of its 8%, 10-year, $1,000 face value bonds with detachable

stock 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?

a. $1,000,000

b. $975,000

c. $900,000

d. $880,000

Explanation

Choice “c” is correct. The net bonds payable is $1,000,000 less $100,000 or $900,000. The issuance of

bonds with detachable stock warrants would be recorded as:

Cr: Cash $1,000,000

Cr: Discount 100,000

Dr: Paid-in-capital, warrants* $ 100,000

Dr: Bonds payable 1,000,000

*$120,000 / ($1,080,000 + $120,000) = 10%

10% x $1,000,000 = $100,000