302 Ch. 16 LO2

On December 1, 2018, Lester Company issued at 103, eight hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Lester's common stock. On December 1, 2018, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be a. $774,560. b. $782,800. c. $800,000. d. $824,000.

B

On July 1, 2018, Chen Company issued for $9,450,000 a total of 90,000 shares of $100 par value, 7% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Chen $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $9,225,000. The market price of the rights on July 1, 2018, was $2.50 per right. On October 31, 2018, when the market price of the common stock was $19 per share and the market value of the rights was $3.00 per right, 36,000 rights were exercised. As a result of the exercise of the 36,000 rights and the issuance of the related common stock, what journal entry would Chen make? a. Cash 540,000 Common Stock 360,000 Paid-in Capital in Excess of Par—Common Stock 180,000 b. Cash 540,000 Paid-in Capital—Stock Warrants 90,000 Common Stock 360,000 Paid-in Capital in Excess of Par—Common Stock 270,000 c. Cash 540,000 Paid-in Capital—Stock Warrants 225,000 Common Stock 360,000 Paid-in Capital in Excess of Par—Common Stock 405,000 d. Cash 540,000 Paid-in Capital—Stock Warrants 135,000 Common Stock 360,000 Paid-in Capital in Excess of Par—Common Stock 315,000

B

On May 1, 2018, Marly Co. issued $2,500,000 of 7% bonds at 103, which are due on April 30, 2028. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2018, the fair value of Marly's common stock was $35 per share and of the warrants was $2. On May 1, 2018, Marly should credit Paid-in Capital from Stock Warrants for a. $175,000 b. $103,000 c. $100,000 d. $ 96,000

B

On May 1, 2018, Payne Co. issued $1,500,000 of 7% bonds at 103, which are due on April 30, 2028. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2018, the fair value of Payne's common stock was $35 per share and of the warrants was $2. On May 1, 2018, Payne should record the bonds with a a. discount of $60,000. b. discount of $16,800. c. discount of $15,000. d. premium of $45,000.

B

The major difference between convertible debt and stock warrants is that upon exercise of the warrants a. the stock is held by the company for a defined period of time before they are issued to the warrant holder. b. the holder has to pay a certain amount of cash to obtain the shares. c. the stock involved is restricted and can only be sold by the recipient after a set period of time. d. no paid-in capital in excess of par can be a part of the transaction.

B

Vernon Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 800, $1,000 bonds with the warrants attached was $820,000. The market price of the Vernon bonds without the warrants was $720,000, and the market price of the warrants without the bonds was $80,000. What amount should be allocated to the warrants? a. $80,000 b. $82,000 c. $96,000 d. $100,000

B

During 2018, Gordon Company issued at 104 five hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon's common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon's stockholders' equity? a. $0 b. $20,000 c. $20,800 d. $19,760

C

On April 7, 2018, Kegin Corporation sold a $6,000,000, twenty-year, 8 percent bond issue for $6,360,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation's common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation's securities had the following market values: 8% bond without warrants $1,008 Warrants 21 Common stock 28 What accounts should Kegin credit to record the sale of the bonds? a. Bonds Payable $6,000,000 Premium on Bonds Payable 232,800 Paid-in Capital—Stock Warrants 127,200 b. Bonds Payable $6,000,000 Premium on Bonds Payable 48,000 Paid-in Capital—Stock Warrants 252,000 c. Bonds Payable $6,000,000 Premium on Bonds Payable 105,600 Paid-in Capital—Stock Warrants 254,400 d. Bonds Payable $6,000,000 Premiums on Bonds Payable 360,000

C

On March 1, 2018, Ruiz Corporation issued $2,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2038. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2018, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2018 as paid-in capital from stock warrants? a. $73,600 b. $85,200 c. $104,000 d. $100,000

C

On May 1, 2018, Marly Co. issued $2,500,000 of 7% bonds at 103, which are due on April 30, 2028. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2018, the fair value of Marly's common stock was $35 per share and of the warrants was $2. On May 1, 2018, Marly should record the bonds with a a. discount of $100,000. b. discount of $25,000. c. discount of $28,000. d. premium of $75,000.

C

On May 1, 2018, Payne Co. issued $1,500,000 of 7% bonds at 103, which are due on April 30, 2028. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2018, the fair value of Payne's common stock was $35 per share and of the warrants was $2. On May 1, 2018, Payne should credit Paid-in Capital from Stock Warrants for a. $57,600. b. $60,000. c. $61,800. d. $105,000.

C

The distribution of stock rights to existing common stockholders will increase paid-in capital at the Date of Issuance Date of Exercise of the Rights of the Rights a. Yes Yes b. Yes No c. No Yes d. No No

C

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably a. zero. b. calculated by the excess of the proceeds over the face amount of the bonds. c. equal to the market value of the warrants. d. based on the relative market values of the two securities involved.

D

Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when a. the market value of the warrants is not readily available. b. exercise of the warrants within the next few fiscal periods seems remote. c. the allocation would result in a discount on the debt security. d. the warrants issued with the debt securities are nondetachable.

D

Stock warrants outstanding should be classified as a. liabilities. b. reductions of capital contributed in excess of par value. c. assets. d. Paid-in capital-stock warrants

D

When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair value of the warrants, the excess should be credited to a. additional paid-in capital from stock warrants. b. retained earnings. c. a liability account. d. premium on bonds payable.

D

Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants.

F

A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values.

T