BondsPlus Inc. (BPI) issued a 5-year, 4.0% coupon, $100,000 par value bond with 2,000 attached warrants. Each warrant had a $5 market value at issuance and is convertible at an exercise price of $17 into one BPI common share ($10 par value). At the time the warrants were exercised, the market value of a common share was $24. Which of the following statements is least accurate with respect to the accounting for these bonds? a. Bond discount is debited $10,000 at the time of issuance. b. Cash is debited $34,000 at the time of exercise. c. Common stock is credited $20,000 at the time of exercise. d. Additional paid-in capital is credited $48,000 at the time of exercise. - Dinesh S
Time of issuance ============== Cash Dr 100000 Bond Discount Dr 10000 Common Stock Warrants Cr 10000 (5*2000) Bond Payable Cr 100000 So A is right. When warrants are exercised ====================== Common Stock warrants Dr 10000 Cash (17 * 2000 ) Dr 34000 Common Stock Cr 20000 (10 * 2000) Additional Paid in Cap Cr 24000 (Plug) So from this both B and C are right. Inaccurate one is D. CP
Agree with cpk
correct ans is D indeed, how was this calculated ?? ------------------ Bond Discount Dr 10000 ------------------ - Dinesh S
The 2000 * 5 = 10000 $ for the Warrants becomes a Bond Discount. Technically the bond of 100000 par = 99000 discount bond with 10000 warrants. (That’s how it is treated per the material).
thanks so much cpk123 for bringing this in light. I did not knew anybit of this. - Dinesh S
This and all of the T-format stuff written above is from the Stalla material.
Do we have this for L1? because I am only using Schweser Study notes, and didn’t see a mention of any of this there? Could you gimme the exact LOS and Reading number? PS: the question is from Stalla Passmaster… - Dinesh S
LOS 10.45B Determine the appropriate classification for debt with equity features and calculate the effect of such instruments on debt-to-total capital ratio I know the question is from PassMaster. If you have passmaster, you can get to the Study Guide from Passmaster itself, and go to Page 25 on the Study guide - to see this sections treatment.
lol, I just looked that up and schweser just explained that section in a 10 line paragraph… No wonder I was scratching my head for past 2 hrs on this… Will surely look up what Stalla has to say on this, as you rightly pointed out, using the “Study Guide” Feature from Passmaster. Thanks cpk!! - Dinesh S
There is just one page covering bond with warrant in CFAI book. It does not cover how warrant is exercised. What is the meaning of par value here?
Par value for stock means almost nothing now. Par Value for the bond means that you will get the par value back (here $100K) at maturity. The warrant here is probably detachable so it is just a separate security. Exercising the warrant is just a really routine paperwork kind of thing involving either tellling your broker to do it and let him handle it or if you have a piece of paper, you have to sign it, send good funds to someone, and tell them where to put the stock you just bought. It’s less difficult than buying a sofa on eBay.