On July 1 2016 Salem Corporation issued 33 million of 9 bond

On July 1, 2016, Salem Corporation issued $3.3 million of 9% bonds payable in 10 years. The bonds pay interest semiannually. The bonds include detachable warrants giving the bondholder the right to purchase for $33, one share of $1 par value common stock at any time during the next 10 years. Salem sold the bonds for $3.3 million. The value of the warrants at the time of issuance was $132,000.

Solution

General Journal Date Account Title Post Ref. Debit Credit July 1, 2016 Cash $ 3,300,000 Discount on Bonds Payable $    132,000 Bonds Payable $ 3,300,000 Paid-in Capital—Stock Warrants $    132,000 Value of bonds with warrants $ 3,300,000 Value of warrants      (132,000) Value of bonds without warrants $ 3,168,000 In this case, the incremental method is used since no separate value is given for the bonds without the warrants.