[cpa1988]

What is this Discount debit? Bonds sold at par.

On December 30, Year 1, Fort, Inc. issued 1,000 of its 8%, 10-year, $1,000 face value bonds with detachable stock warrants at par. Each bond carried a detachable warrant for one share of Fort’s common stock at a specified option price of $25 per share. Immediately after issuance, the market value of the bonds without the warrants was $1,080,000 and the market value of the warrants was $120,000. In its December 31, Year 1, balance sheet, what amount should Fort report as bonds payable?

a. $975,000

b. $1,000,000

c. $880,000

d. $900,000

Explanation

Choice “d” is correct. The net bonds payable is $1,000,000 less $100,000 or $900,000. The issuance of bonds with detachable stock warrants would be recorded as:

Debit (Dr) Credit (Cr)

Cash $ 1,000,000

Discount 100,000

Paid-in-capital, warrants $ 100,000*

Bonds payable 1,000,000

*$120,000 / ($1,080,000 + $120,000) = 10%

10% x $1,000,000 = $100,000

Choice “b” is incorrect. The bonds would have a contra account for the discount.

Choice “a” is incorrect. The value of the warrants and bonds are used to determine the net bonds payable.

Choice “c” is incorrect. The value of the warrants and bonds are used to determine the net bonds payable.

[haseltonk]

Even though the bonds were sold at par (no discount or premium) the detachable warrants have (implied) value. MV is given so they are basically saying that based on market value following issue, the warrants equate to 10% of the total consideration ($120k/1,200,000). You are plugging the bond payable (question stem) by subtracting the pro-rated portion of the warrants from the actual bond payable. Kind of confusing, but you are just backing into the MV of the warrants from the bond issue, without changing the B/P.

[Author]

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