Sunland Corporation issued 2,100, $1,000 bonds at 101. Each bond was issued with one detachable...

Question:

Sunland Corporation issued 2,100, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market price of $40.

Use the proportional method to record the issuance of the bonds and warrants.

Proportional Method:

The proportional method is used in order to allocate the value of a lump-sum purchase to the assets acquired in the purchase. Under this method, allocation percentages are calculated for each asset based on the asset's individual fair value in relation to the sum of all the acquired assets' individual fair values.

Answer and Explanation:

To allocate the purchase price to the assets, we'll begin by calculating allocation percentages for each instrument. Then, we'll multiply the percentages by the purchase price.

Individual Fair Value Total Fair Value Allocation Percentage Lump-Sum Purchase Price
(2,100 x $1,000 x 1.01)
Allocated Value
Bonds (2,100 x $1,000 x 0.98) $2,058,000 / $2,142,000 = 96.08% x $2,121,000 = $2,037,856.80
Warrants (2,100 x $40) $84,000 / $2,142,000 = 3.92% x $2,121,000 = $83,143.20
Total $2,142,000 / $2,142,000 = 100%

Having calculated the values to be allocated to each instrument, we can now journalize.

Account Debit Credit Explanation
Cash $2,121,000 Record amount received from sale (2,100 x $1,000 x 1.01)
Discount on Bonds Payable $62,143.20 Record discount on bonds ($2,100,000 - $2,037,856.80)
Bonds Payable $2,100,000 Record bonds at face value
Additional Paid-In Capital $83,143.20 Record value assigned to warrants

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