Iman,
Does Becker not give you more of an explanation (other than just the JE?). If not, I have a completely new appreciation for CPA excel (they go above and beyond explain the correct answers and the incorrect).
My question aside. I approach these problems starting with what I know and set up a JE:
1.) $1m bonds at 109 means that you are going to receive ($1m x 1.09) upon issuance (DR Cash $1,090,000)
2.) Bonds payable is always going to be the Face amount (CR $1million Bond payable)
3.) When warrants are issued with bonds and you know the warrant market value, that is what you use to record value of the warrants. Since they are convertible to stock and have a value upon issuance, calculate their value by the following: 1) find total bonds issued: $1m/$1,000 bonds = 1,000 bonds issued. 2.) Find out how many warrants this gives you: each 1k bonds is granted with 50 warrants = 50,000 warrants x $4 market value established = $200,000 value for the warrants convertible to stock. Final: CR: APIC – warrants $200,000
4.) You can then find the premium or discount easiest by plugging the balance ($1,000,000 + $200,000 – $1,090,000) = $110,000 Discount (DR).
Note that when detachable stock warrants are issued with bonds, the premium/discount isn't as simple as looking at what the bonds were issued for (109 implies a premium). You have to first find out the value of the warrants and back into the premium or discount.
BEC - Passed
AUD - Passed
FAR - 10/28/14 (waiting results)
REG - Passed
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