During 2012, Gordon Company issued at 104 three hundred, $1,000 bonds due in ten years.One detachable share warrant entitling the holder to purchase 15 shares of Gordon's ordinary shares was attached to each bond.At the date of issuance, the market value of the bonds, without the share warrants, was quoted at 96.The fair value of each detachable warrant was quoted at $40.What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon's equity?

Question

Quizplus · Accepted Answer

The total proceeds from the issuance of bonds can be calculated as follows:
300 bonds x $1,000 face value x 104% issue price = $312,000
The total fair value of the detachable warrants is:
300 bonds x 15 warrants per bond x $40 fair value per warrant = $180,000
Therefore, the portion of proceeds that should be accounted for as part of Gordon's equity is:
$180,000 fair value of warrants / ($312,000 + $180,000) total proceeds = 36%
$312,000 x 36% = $112,320
However, since the bonds were issued at a discount, the $112,320 should first be applied to reduce the discount on the bonds.
Discount on bonds = ($1,000 face value - $960 issue price) x 300 bonds = $12,000
$112,320 - $12,000 = $100,320
Therefore, the answer is (C) $24,000 (which is 36% of $312,000), but since it was used to reduce the bond discount, only $12,000 is added to equity, and $12,480 will be the total interest expense over the life of the bonds that need to be recognized as an expense.

During 2012, Gordon Company Issued at 104 Three Hundred, $1,000