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Hoffman Corporation issued $80 million of 8%, 20-year bonds at 105. Each of the 80,000 bonds was issued with 10 detachable stock warrants, each of which entitled the bondholder to purchase, for $20, one share of $1 par common stock. At the time of sale, the market value of the common stock was $25 per share and the market value of each warrant was $7. Prepare the journal entry to record the issuance of the bonds.

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TomShelby

Answer:

cash 84,000,000 debit

discount on BP 1,250,000 debit

  bonds payable 80,000,000 credit

 warrant of CS      5,250,000 credit

Explanation:

bond(1,000 x 105/100)        1050  93.75%       (1050/1120)

warrant($7 x 10 per share)    70    6.25%          (70/1120)

Total per share                1120

Cash proceeds:   80,000 x 1,000 x 105/100 = 84,000,000

Bonds x 93.75 = 78,750,000

Warrant x 6.25 =  5,250,000

Bonds face value 80,000,000

proceeds              78,750,000

discount                  1,250,000

journal entry

cash 84,000,000 debit

discount on BP 1,250,000 debit

  bonds payable 80,000,000 credit

 warrant of CS      5,250,000 credit

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