Chapter 14, Problem 14.17E

Warrants. DHC Associates issued 2,100 of its $1,000, 8%, 5-year par value bonds. There are no bond issue costs. Interest is paid annually. The market rate on the date of issue was 9%. The market price of DHC common shares on the date that the bonds are issued is $50 per share. The bonds were sold with 50,000 warrants to acquire 50,000 shares of the company’s $1 par value common stock for $40 per share. That is, each bond carries 25 warrants DHC has existing bonds outstanding that trade without warrants at $920. There are other DHC warrants outstanding that trade for $40 each.

Required

1. a. Determine the issue price of the bonds.
2. b. Prepare the journal entry to record issuance of the bonds assuming that the warrants are non detachable.
3. c. Prepare the journal entry to record the issuance of the bonds assuming that the warrants are detachable using the proportional method.
4. d. Prepare the journal entry to record the issuance of the bonds assuming that the warrants are detachable using the incremental method. Assume that the fair value of the bonds is more reliable.
5. e. Assuming that the incremental method is used prepare the journal entry required to record the exercise of all warrants.