Illiad Inc. has decided to raise additional capital by issuing $170,000 face val
ID: 2424855 • Letter: I
Question
Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000. If the warrants were nondetachable, would the entries be different? Discuss.Explanation / Answer
When detachable warrants are issued, allocate the proceeds from the sale of a debt instrument with detachable warrants between the two items, based on their free-standing relative fair values on the issuance date. Allocate the portion of the proceeds assigned to the warrants to paid-in capital, and the remainder to the debt instrument.
For Non-detachable warrants are recorded as a liability on the balance sheet
Total Warrants issued are = 170,000/100 = 1,700
Warrants Market value is recorded as a liability in the books for Non-detachable warrants = 24,000 $