On August 1, 2022, United Corporation issued $10.10 million of 10% bonds at 104. The bonds mature in 20 years. Each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase, for $51, one share of United $5 par common stock. World Company purchased 15% of the bond issue. On August 1, 2022, the market value per share for United stock was $57 and the market value of each warrant was $5. In March 2028, when United common stock had a market price of $71 per share and the unamortized premium balance was $310,000, World exercised the warrants it held.

Required:

1. Prepare the journal entries on August 1, 2022, to record (A) the issuance of the bonds by United and (B) the investment by World.

2. Prepare the journal entries for both companies in March 2028 to record the exercise of the warrants.

Answer and Explanation:

The Journal Entries is shown below:-

1.

A. Issuance of the bonds by United

Cash Dr, $10,504,000

($10.10 million * 104%)

Discount on bonds payable Dr, (Diff) $858,500

To Bonds payable $10,100,000

To Stock warrants $

1,262,500

($10,100,000 : $1,000 * 25 * $5)

(10,100 * 25 * $5)

(Being issue of bonds with warrants is recorded)

B. The investment by World

Investment in stock bonds Dr, $189,375

($1,262,500 * 15%)

Investment in bonds Dr, $1,515,000

($10.10 million * 15%)

To discount on bond investment $128,775

To Cash $1,575,600

($10.10 million * 104% * 15%)

(Being investment by W is recorded)

2.

To record the exercise of the warrants

Cash Dr, $1,931,625

(15% * 10,100 * $51 * 25)

Paid-in-capital - stock warrants outstanding $189,375

($1,262,500 * 15%)

To Common stock $189,375

(15% * 10,100 * 25 * $5)

To paid-in-capital in excess of par $1,931,625

(Being the conversion of bonds is recorded)

Investment in common stock Dr, $2,121,000

To Investment in stock warrants $189,375

To Cash $1,931,625

(15% * 10,100 * 25 * $51)

(Being the investment in common stock is recorded)