On May 1, 2020, Ayayai Company issued 2,400 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 99, but the fair value of the warrants cannot be determined. Instuctions
a. Prepare the entry to record the issuance of the bonds and warrants
b. Assune the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry to record the issuance of the bonds and warrants.

A. Dr Cash$2,448,000

Dr Discount on bond payable$24,000

Cr Bond payable $2,400,000

Cr Paid in capital stock warrants $72,000

B. May 1

Dr Cash$2,448,000

Dr Discount on bonds payable$24,713

Cr Bonds payable $2,400,000

Cr Paid in capital stock warrants $72,713

Explanation:

a. Preparation of the entry to record the issuance of the bonds and warrants

May 1

Dr Cash$2,448,000

Dr Discount on bond payable$24,000

Cr Bond payable $2,400,000

Cr Paid in capital stock warrants $72,000

(To record the issuance of the bonds and warrants )

Workings:

Cash = (2,400 * 1,000) * 102%

Cash = 2,400,000 * 1.02

Cash = $2,448,000

Discount on bond payable = (2,400 * 1,000) * (1 - 99%)

Discount on bond payable = 2,400,000 * 0.01

Discount on bond payable = $24,000

Bond payable = 2,400 * 1,000

Bond payable = $2,400,000

Paid in capital stock warrants = 2,448,000 + 24,000 - 2,400,000

Paid in capital stock warrants = $72,000

b.Preparation of the entry to record the issuance of the bonds and warrants Assume the same facts as part (a), except that the warrants had a fair value of $30.

May 1

Dr Cash$2,448,000

Dr Discount on bonds payable$24,713

Cr Bonds payable $2,400,000

Cr Paid in capital stock warrants $72,713

(To record the issuance of the bonds and warrants )

Workings:

Fair value of bonds = (2,400 * 1,000) * 98%

Fair value of bonds = 2,400,000 * 0.98

Fair value of bonds = $2,352,000

Fair value of warrants = 2,400 * 30

Fair value of warrants = $72,000

Fair value = $2,352,000 + 72,000

Fair value = $2,424,000

Allocated to bonds=$2,352,000/$2,424,000*$2,448,000

Allocated to bonds=$2,375,287

Allocated to warrants=$72,000/$2,424,000*$2,448,000

Allocated to warrants=$72,713

Cash = 2,400 * 1,000 * 102%

Cash = 2,400,000 * 1.02

Cash = $2,448,000

Discount on bonds payable = 2,400,000 - $2,375,287

Discount on bonds payable = $24,713

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