On April 7 2017 Ortiz Corporation sold a 4000000 twentyyear

On April 7, 2017, Ortiz Corporation sold a $4,000,000, twenty-year, 8 percent bond issue for $4,240,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation\'s common stock for $30. The stock has a par value of $25 per share. immediately after the sale of the bonds, the corporation\'s securities had the following market values: 8% bond without warrants Warrants Common stock $1,008 21 28 What is the journal entry to record the sale of the bonds? What is the entry if Ortiz did not know the market value of the stock warrants?

Solution

Fair value of bonds (without warrants) ($4,000,000 x 1008/1000)               4,032,000 Fair value of warrants (8,000 x $21)                  168,000 Aggregate fair value               4,200,000 Allocated to bonds: 4032000 x 4240000/4200000 =               4,070,400 Allocated to warrants: 168000 x 4240000/4200000 =                  169,600 Total allocation =               4,240,000 Journal Entry - when fair value of warrant given Cash $          4,240,000 Premium on bonds payable $              70,400 Bonds payable $        4,000,000 Paid-in Capital—Stock Warrants $            169,600 If fair value of warrant not given, then incremental method is used Lump-sum receipt               4,240,000 Less: Allocated to bonds ($4,000,000 x 1008/1000)               4,032,000 Balance allocated to warrants                  208,000 Cash $          4,240,000 Premium on bonds payable $              32,000 Bonds payable $        4,000,000 Paid-in Capital—Stock Warrants $            208,000