Bonds with Detachable Warrants: On January 1, 2010, the London Company issued $5

Question

Bonds with Detachable Warrants: On January 1, 2010, the London Company issued $500,000 of 11.5% bonds due January 1,2020, at 102. The bonds pay interest semiannually on June 3 and December 31. Each $1,000 carried 20 warrants, and the exchange of two warrants allowed the holder to acquire one share of $10 par common stock for $50. Shortly after the time of issue, the bonds were quoted at 98 ex rights and each individual warrant was quoted at $5. Subsequently, on March 31,2010,8,000 rights were exercised. Required: Prepare the journal entry to record the bond issue. What is the value of each warrant? Prepare the journal entry on /March 31,2010 to record the exchange of the warrants for common shares.

Explanation / Answer

1. on 1.1.2010:-

a.

Bank A/c Dr. $ 510000

To 11.5% bond A/c $490000

To premium on bond issue A/c $10000

2. value of warrant:-

$2

3.on 31.3.2010:-

Bank A/c Dr. $200000

To Share Capital A/c $40000

To Share Premium A/c $160000

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