Bonds with Warrants Question

into, accounting, statements, following, exercise

I am having trouble understanding the computation for this problem. Its from the Stalla Practice Exam.
BPI issued a 5 year, 4% coupon, $100,000 par value bond with 2000 attached warrants. Each warrant had a $5 market value at issuance and is convertible to an exercise price of $17 into 1 BPI common share ($10 par value). At the time the warrants were exercised, the market value of a common share was $ 24. Which if the following statements is accurate with respect to the accounting for these bonds at the time of exercise?
A. Bond discount is debited $10,000
B. Common Stock is credited $10,000
C. Additional paid in capital is credited $48,000.
The answer is A.
Thanks…

AnalystForum

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发表于 2013-4-8 20:43 | 只看该作者

I would have gotten this wrong as well. Did they post an explanation?
This is what I would have done:
At issue: $90,000 in liabilities, $10,000 in equity
At exercise: No change to liabilities. Using Treasury Method, 583 net shares, so $5833 to Common Stock and $4083 to Additional Paid in Capital
Anyone know what I did wrong?

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liquidity

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发表于 2013-4-8 20:43 | 只看该作者

USGAAP, APB 14: if the warrants are detachable, you would allocate the equity proportion at issue.
If the warrants are nondetachable, as indicated in this case, you are not allowed to allocate the equity proportion until exercised.
Upon exercised, I understand you have two options:
fair market value of the options = 2417= 7
relative market value of the option at issued= 5
I see that they choose the second option and deduct 5* 2000 warrants from the book value of the bond, thus the transaction looks like (assuming that the bondholders pay cash to exercise)
Cash 17*20 = 34 000
Bond discount 10 000
Common stock 20 000
CIP 24 000
Thus B and C are thus wrong, even in the if you credit the bond discount with market value of the bond
Any CPA around to confirm this.

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Carson

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发表于 2013-4-8 20:44 | 只看该作者

Ahh missed the word attached. Thanks for pointing that out.

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JonnyKay

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发表于 2013-4-8 20:44 | 只看该作者

The solution posted was:
The company will be able to offer lower interest rate on bonds due to the warrants having value at time of issue. The $ 10,000 bond discount equals the value attributed to the warrants.
Cash 100,000
Bond Discount 10,000
Bonds Payable 100,000
Warrants 10,000

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