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Q4BE.

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Intermediate Accounting (Kieso)
Found in: Page 874

Short Answer

Eisler Corporation issued 2,000 $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market price of $40. Use the proportional method to record the issuance of the bonds and warrants.

Cash and discount on bonds payable are to be debited with $2,020,000 and $59,216, respectively. Bonds payable and paid-in Capital- Stock warrants will be credited with $2,000,000 and $79,216, respectively.

See the step by step solution

Step by Step Solution

Step 1: The information given in the question are as follows:

Bonds Payable $2,000,000

Discount on Bonds Payable $59,216 ($2,000,000 – $1,940,784)

Fair value of bonds$1,960,000 (2,000 X $1,000 X 98)

Fair value of warrants$80,000 (2,000 X $40)

Allocated to bonds$1,940,784 [($1,960/$2,040) X $2,020,000]

Allocated to warrants$79,216 [($80/$2,040) X $2,020,000]

Step 2: Recording the issuance of the bonds and warrants

Date

Transaction

Debit

Credit

Cash

$2,020,000

Discount on Bonds Payable

$59,216

Bonds Payable

$2,000,000

Paid-in Capital—Stock Warrants

$79,216

Being bonds are issued at discount

Fair value of bonds

$1,960,000

Fair value of warrants

$80,000

Aggregate fair value

$2,040,000

Allocated to bonds

$1,940,784

Allocated to warrants

$79,216

$2,020,000

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