On March 1, 2014, Ruiz Corporation issued $1,500,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2034. 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, 2014, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2014 as paid-in capital from stock warrants?

Question

Quizplus · Accepted Answer

The amount recorded as paid-in capital from stock warrants can be determined by allocating the proceeds between the bonds and the warrants based on their fair values. The fair value of the bonds without the warrants is 95% of the face value, and the fair value of the warrants is given as $2.00 each. First, calculate the total proceeds from the bond issuance:$1,500,000 * 104% = $1,560,000Calculate the fair value of the bonds without the warrants:$1,500,000 * 95% = $1,425,000Calculate the fair value of the warrants:25 warrants/bond * $2.00/warrant * 1,500 bonds = $75,000The total fair value is the sum of the fair value of the bonds without the warrants and the fair value of the warrants:$1,425,000 (bonds) + $75,000 (warrants) = $1,500,000Since the total fair value equals the face value of the bonds, and the fair value of the warrants is given as $75,000, this is the amount that should be recorded as paid-in capital from stock warrants.

On March 1, 2014, Ruiz Corporation Issued $1,500,000 of 8