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.
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)
|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.
|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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from Financial Accounting: Help and ReviewChapter 8 / Lesson 7