On December 1, 2017, Cairo Ltd.issued 500 of its 9%, $1,000 bonds at 103.Attached to each bond was one detachable warrant entitling the holder to purchase ten of Cairo's common shares.At this time, the market value of the bonds, without the warrants, was 95, and the market value of each warrant was $50.Using the residual method, the amount of the proceeds from the issuance that should be credited to Bonds Payable would be
A)$475,000.
B)$489,250.
C)$500,000.
D)$515,000.

Question

Quizplus · Accepted Answer

The residual method allocates the proceeds first to the warrants based on their market value, and the remainder to the bonds. The total proceeds are $515,000 (500 bonds x $1,000 x 103%). The value of the warrants is $25,000 (500 bonds x $50). Therefore, the amount credited to Bonds Payable is $515,000 - $25,000 = $490,000. However, since the bonds' market value without warrants is 95%, the correct allocation to Bonds Payable is $475,000 (500 bonds x $1,000 x 95%).