On March 1, 2012, Ruiz Corporation issued $800,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2032.In addition, each $1,000 bond was issued with 25 detachable share warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz ordinary shares, par value $25.The bonds without the warrants would normally sell at 95.On March 1, 2012, the fair value of Ruiz's ordinary shares was $40 per share and the fair value of the warrants was $2.What amount should Ruiz record on March 1, 2012 as share premium-share warrants?

Question

Quizplus · Accepted Answer

The first step is to calculate the total amount of the share premium, which is the difference between the amount received from the bond issuance with warrants and the amount the bonds would have sold for without the warrants. 
Amount received from bond issuance: $800,000 x 104% = $832,000 
Amount the bonds would have sold for without warrants: $800,000 x 95% = $760,000 
Total share premium: $832,000 - $760,000 = $72,000

Next, we need to allocate the share premium between the bonds and the warrants. To do this, we need to determine the relative fair values of the bonds and the warrants. 
Fair value of bonds: $800,000 x 95% = $760,000 
Fair value of warrants: 25 warrants per bond x $2 per warrant x 800 bonds = $40,000 
Total fair value: $760,000 + $40,000 = $800,000

The ratio of the fair value of the warrants to the total fair value is: 
$40,000 / $800,000 = 5%

Therefore, 5% of the total share premium of $72,000 is allocated to the warrants: 
Share premium - bonds = $72,000 x 95% = $68,400 
Share premium - warrants = $72,000 x 5% = $3,600

Thus, the amount that Ruiz should record on March 1, 2012 as share premium-share warrants is $3,600.

On March 1, 2012, Ruiz Corporation Issued $800,000 of 8