On September 1, 2017, Buffalo Company sold at 104 (plus accrued interest) 4,200 of its 996,...

Question:

On September 1, 2017, Buffalo Company sold at 104 (plus accrued interest) 4,200 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common stock at a specified option price of $14 per share. Shortly after issuance, the warrants were quoted on the market for $3 each. No fair value can be determined for the Buffalo Company bonds. Interest is payable on December 1 and June 1. Bond issue costs of $23,900 were incurred.

Required:

Prepare in general journal format the entry to record the issuance of the bonds.

Incremental Method:

At times, bonds and detachable stock warrants are issued for a single price. However, although these items are issued together, they must be recorded in separate accounts. To do so, the purchase price must be allocated between these two instruments based on their individual fair values. If only the fair value of one is known, the incremental method is used. Under this method, the instrument with the known fair value receives its portion of the purchase price first. Any remaining money from the purchase is then attributed to the other instrument whose fair value is unknown.

Answer and Explanation:

Date Account Debit Credit Explanation
Sept. 1, 2017 Cash $4,438,600 Record cash received from issuance plus interest net bond issuance cost ((4,200 bonds x $1,000 per bond x 1.04) + (4,200 x $1,000 x 9% x (3/12)) - $23,900)
Bond Issue Cost $23,900 Record bond issue costs incurred
Interest Payable $94,500 Record interest payable for 3 months to account for interest accrued since last payment date on June 1. (4,200 x $1,000 x 9% x (3/12 months))
Additional Paid-In Capital, Stock Warrants $25,200 Record fair value of warrants (4,200 bonds x 2 warrants per bond x $3 per warrant)
Bonds Payable $4,200,000 Record bonds payable at face value
Premium on Bonds Payable $142,800 Record amount attributed to bonds in excess of par value ((4,200 x $1,000 x 1.04) - $4,200,000 face value - $25,200 warrants)

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