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5 Cards in this Set
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When using the book value method of convertible bonds, how do you account for the value of common stock? Of bonds? |
You simply take the book value of bonds (plus premiums/minus discounts) and the par value of stock (regardless of mkt). The excess is credited to PIC |
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Which of the following statements characterizes convertible debt? *The holder of the debt must be repaid with shares of the issuer's stock. *No value is assigned to the conversion feature when convertible debt is issued. *The transaction should be recorded as the issuance of stock. *The issuer's stock price is less than the market value when the debt is converted. |
No value is assigned to the conversion feature when convertible debt is issued. In contrast to stock issued with detachable warrants bonds convertible to stock are recorded the same way as non convertible bonds. |
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On December 30th 2004 Fort Inc issued 1000 of its 8% 10 year $1,000 face value bonds with detachable stock warrants at par. Each bond carried a detachable warrant for one share of forts common stock at a specified option price of $25 per share. Immediately after issuance the market value of the bond without the warrant was $1,080,000 and the market value of the warrant was $120,000. In its 2004 balance sheet, what amount should Fort report as bonds payable? $1000000 975,000 900,000 880,000
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$900,000. Calculated as follows: Bonds issued at par, 1,000,000. Total mkt value=1,200,000 (1080+120) So, (1,080,000/1,200,000)1,000,000=900,000
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On July 28th Vince Corp sold $500,000 of 4%, 8 years subordinated debentures for $450,000. The purchasers were issued 2000 detachable warrants each of which was for one share of $5 par common stock at $12 per share. Shortly after the issuance the warrants sold at a market price of $10 each. What amount of discount on the debentures should vince record at issuance? 50000 60000 70000 74000 |
70,000. The market value of the detachable warrants that issuance is allocated to owner's equity with the remainder of the proceeds being allocated to the bonds. The value of the warrants is 2000x10=20000. This leaves 430,000 (450-20), to allocate to the bond issue. Total face value of bonds is 500,000 yielding 70,000 of discount, 500-430=70 |
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Describe treatment of detachable warrants for bonds and debentures when only the market price of the warrants are known. |
Instead of allocating amounts based on percentage of market values of both, you use the market value of warrants given for the cost of warrants |
