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Hoffman Corporation issued $60 million of 8%, 20-year bonds at 105. Each of the 60,000 bonds was issued with 13 detachable stock warrants, each of which entitled the bondholder to purchase, for $26, one share of $1 par common stock. At the time of sale, the market value of the common stock was $31 per share and the market value of each warrant was $5. Prepare the journal entry to record the issuance of the bonds.
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Question & Answer: Hoffman Corporation issued $60 million of 8%, 20-year bonds at 105. Each of the 60,000 bonds was issued with 13 detachable stock…..
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| General Journal | Debit | Credit |
| Cash | $63,000,000 | |
| Discount on bonds payable | $900,000 | |
| Bonds payable | $60,000,000 | |
| Equity—stock warrants | $3,900,000 |
The issue price of bonds with detachable warrants is allocated between the two different securities on the basis of their market values.
Cash (105% × $60 million) = $63 million
Equity—stock warrants outstanding ($5 × 13 warrants × 60,000 bonds) = $3.9 million
