Use the following information for questions 59 and 60.
On May 1, 2014, Marly Co. issued $1,500,000 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 Marly'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 Marly's common stock was $35 per share and of the warrants was $2.
-On May 1, 2014, Marly should record the bonds with a

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The bonds were issued at 103, which is a premium. The premium is calculated by multiplying the face value of the bond by the percentage of the premium, which is 3% (103 - 100). Thus, the premium on the bond issue is $45,000 (1,500,000 x 3%). However, since the bonds have detachable warrants, Marly must first allocate the proceeds between the bonds and the warrants. The value of the warrants is calculated by multiplying the number of warrants attached to each bond (20) by the fair market value of each warrant ($2) and then by the number of bonds issued (1,500). That calculation yields a total warrant value of $60,000 (20 x 2 x 1,500). Marly must subtract the warrant value from the premium to arrive at the premium allocated to the bonds. That calculation yields a bond premium of $45,000 - $60,000 = ($15,000). Since the bonds without the warrants would sell at 96 (a discount), Marly should record the bond issue with a discount of $16,800 (1,500,000 x 96% x 1/2 year). The discount is calculated as $135,000 (1,500,000 x 9%) for the full 10-year term and then proportioned for one-half year (May 1 to December 31, 2014). Therefore, the entry to record the bond issue is:
Cash $1,549,200 (1,500,000 x 103%)
Discount on bonds payable ($16,800) (1,500,000 x 96% x 1/2 year)
Bonds payable $1,532,400 (($1,500,000 + $45,000) - $60,000)

Use the Following Information for Questions 59 and 60