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# Journal Entries for Bonds with Detachable Warrants

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On May 1, 2007, Friendly Company issued 2,000 \$1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the market value of the warrants cannot be determined.

a.
Prepare the entry to record the issuance of the bonds and warrants.

b.
Assume the same facts as part (a), except that the warrants had a fair value of \$30. Prepare the entry to record the issuance of the bonds and warrants.

#### Solution Preview

a. Prepare the entry to record the issuance of the bonds and warrants.

We know that the total proceeds were 2,000*\$1,000*(102/100), or \$2,040,000. We know that the value of the bonds alone was 2,000*\$1,000*(98/100), or \$1,960,000. (The bonds are selling at a discount of 2,000*\$1,000*(100-98)/100), or \$40,000.) We do not know the value of the warrants, so we must assume they are valued at \$2,040,000-\$1,960,000, or \$80,000.

5/1/07 Cash \$2,040,000
Discount on bonds payable 40,000
...

#### Solution Summary

This solution illustrates how to journalize the issuance of bonds with detachable warrants when the market value of the warrants are known and when it is not known.

\$2.19