On December 1, 2020, Junction Company issued at 104, 800 of its 9%, 10-year, $1,000 par value, nonconvertible bonds with detachable stock purchase warrants. Each bond carried two detachable warrants; each warrant was for one share of common stock at a specified option price of $15 per share. Shortly after issuance, the warrants were quoted on the market for $3 each. No fair value can be determined for the bonds without the warrants. Interest is payable on December 1 and June 1. Provide the entry to record issuance of the bonds by Junction Company on December 1, 2020.

Junction Company

Journal Entry

December 1, 2020:

Debit Cash $832,000

Credit Bonds Payable $800,000

Credit Bonds Premium $27,038

Credit Warrants Liability $4,962

To record the issuance of the bonds.

Explanation:

a) Data and Calculations:

December 1, 2020:

Face value of nonconvertible bonds with detachable stock purchase warrants = $800,000

Issue price of bonds = $832,000 (1.04 * 800 * $1,000)

Number of bonds issue = 800

Par value per bond = $1,000

Maturity period = 10 years

Coupon interest rate = 10%

Option price of each warrant = $15 per common stock share

Market price of the option = $3

Value of warrant = $4,800 ($3 * 800 * 2)

Allocation of bond price:

Bonds = $827,038 ($800,000/$804,800 * $832,000)

Warrants = $4,962 ($4,800/$804,800 * $832,000)

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