Use the following information for questions 55 and 56.
On May 1, 2014, Payne Co. issued $900,000 of 7% bonds at 103, which are due on April 30, 2024. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2014, the fair value of Payne's common stock was $35 per share and of the warrants was $2.
-On May 1, 2014, Payne should record the bonds with a

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The bonds are issued at 103, which is a premium of $27,000 (900,000 x 3%). However, the bonds with detachable warrants must be recorded at their fair value. The fair value of the warrants is $2 x 20 = $40. Thus, the fair value of the bond without the warrants is $1,040 ($1,000 + $40), and the fair value of the warrants is $40. Since the fair value of the bond without warrants is less than the face value of the bond, the bonds must be recorded at a discount. The amount of the discount is the difference between the face value of the bond and its fair value without the warrants, which is $60 ($1,000 - $960). The total amount of the discount is $60 x 900 = $54,000. However, the company issues 20 detachable stock warrants with each $1,000 bond. Each warrant has a fair value of $2, so the total fair value of the warrants is $40. Therefore, the total amount of the discount is reduced by $40 x 900 = $36,000. The net amount of the discount is $54,000 - $36,000 = $18,000. The discount is then allocated between the bonds and the warrants. The bonds are recorded at their fair value of $1,040, so the discount on the bonds is $40 ($1,080 - $1,040). The discount on the warrants is $18,000 - $40 x 900 = $14,400. Therefore, the company should record the bonds with a discount of $10,080 ($40 x 252).

Use the Following Information for Questions 55 and 56