[12tang]

On July 28, Vent Corp. sold $500,000 of 4%, eight-year subordinated debentures for $450,000. The purchasers were issued 2,000 detachable warrants, each of which was for one share of $5 par common stock at $12 per share. Shortly after issuance, the warrants sold at a market price of $10 each. What amount of discount on the debentures should Vent record at issuance?

Why do they use the $10 to value the warrants? I would think $12 makes more sense. What did they do, record the entry but said “oh wait, a short period later, the market price is $10 so lets change the entry?”

AHHH I hate these bond questions!!!

Using Becker self-study
FAR: (82) 175 hours - 1st attempt
BEC: (XX)
AUD: (69) 45hrs of study - 1st attempt
REG: (XX)

[sar_rah]

At issue, you must value the warrants at their fair market value. The $12 is just the purchase price you paid to acquire them. The $10 is the fair market value at that date, AKA, the amount that would be converted at that date if exercised. For shortly after issuance, just think of mark to market using the best available information you have.

AUD: 98
REG: 91
BEC: 86
FAR: 83

DONE DONE DONE and DONE all on the first try! It IS possible, just keep on studying!

[Author]

Replies