On March 1, 2010, Ruiz Corporation issued $800,000 of 8% nonconvertible bonds at

Question

On March 1, 2010, Ruiz Corporation issued $800,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2030. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2010, the fair market value of Ruiz's common stock was $40 per share and the fair market value of the warrants was $2.00. What amount should Ruiz record on March 1, 2010 as paid-in capital from stock warrants?

Explanation / Answer

To split out the paid-in capital for the warrants versus the debt issued, you would use relative fair market value. We are given the fair market value of the warrants as $2, and we are given the fair market value of the debt without the warrants, which is $95. The paid in capital attributable to the warrants is simply the relative fair market value of the warrants as of March 1, 2010. Calculations: Total warrants = 25 warrants per bond x $800,000 par issued / 1,000 par per bond = 20,000 warrants Total Fair Market Value of Warrants = $2 per warrant * 20,000 warrants = $40,000 Total Fair Value of Debt = 95% value without warrants * $800,000 par issued = $760,000 Total money received = $800,000 * 104% of par = $832,000 Relative market value of debt = 760 / (40+760) * $832,000 = $790,400 Relative market value of warrants = 40 / (40+760) = $41,600 (This is the amount we allocate to paid-in capital Discount on Bonds Payable = $800,000 par issued - $790,400 allocated value = $9,600. Journal entry to record issuance of debt: Debit Credit Cash 832,000 Discout on Bonds Payable 9,600 Bonds Payable 800,000 Paid-in-Capital - Warrants 41,600 Total Debits = Total Credits = $841,600.

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