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Accounting for Detachable Warrants

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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 600, $1,000 bonds with the warrants attached was $615,000. The market price of the Vernon bonds without the warrants was $540,000, and the market price of the warrants without the bonds was $60,000. What amount should be allocated to the warrants?

a. $60,000
b. $61,500
c. $72,000
d. $75,000

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Solution Summary

This solution will illustrate, step-by-step, how to determine the total fair value of the securities issues, the percentage allocable to each component, how to allocate the proceeds between them, and how to journalize the transaction.

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1. We must determine the total fair value of the securities issued and the portion of that fair value allocable to each security:
Security Fair value % of Total
Bond $540,000 90% $540,000 is the value of the bonds without the ...

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