On March 1, 2017, Rabat Corp.sold $300,000 (par value), 20 year, 8% bonds at 104.Each $1,000 bond was issued with 25 detachable warrants, each of which entitled the bondholder to purchase for $50 one of Rabat's no par value common shares.The bonds without the warrants would normally sell at 95.At this time, the market value of Rabat's common shares was $40 per share and the market value of each warrant was $2.00.Using the relative fair value method, what amount should Rabat record on March 1, 2017 as Contributed Surplus-Stock Warrants?

Question

Quizplus · Accepted Answer

First, we need to calculate the fair value of the bonds without the warrants. 
$300,000 x 0.95 = $285,000

Then, we need to calculate the total fair value of the warrants: 
25 warrants per bond x $2.00 per warrant = $50.00

Since each bond has 25 warrants, the fair value of the warrants per bond is: 
25 warrants x $2.00 per warrant = $50.00

So, the fair value of the bonds with the warrants is: 
$285,000 + ($50.00 per bond x 300 bonds) = $300,500

The difference between the selling price of the bonds with the warrants and their fair value is: 
$300,500 - ($300,000 x 1.04) = $7,800

Therefore, the amount that Rabat should record as Contributed Surplus-Stock Warrants on March 1, 2017 is: 
$7,800 x 25 warrants per bond x 300 bonds = $15,600.

So, the correct answer is D ($15,600).