On September 30,2018,Pennsylvania Co.issued $3 million of 10%,10-year convertible bonds maturing on September 30,2028,with semi-annual coupon payments on March 31 and September 30.Each $1,000 bond can be converted into 80 no par value common shares.In addition,each bond included 20 detachable common stock warrants with an exercise price of $20 each.Immediately after issuance,the warrants traded at $5 each on the open market.Gross proceeds on issuance were $4.6 million (including accrued interest).From these proceeds,the company paid underwriting fees of $55,000.Without the warrants and conversion features the bond would be expected to yield 6% annually.Pennsylvania's year-end is December 31.
On February 22,2021,warrant holders exercised one-half of the warrants.The shares of Pennsylvania traded at $44 each on this day.
Required:
a)Determine how Niagara should allocate the $4,600,000 proceeds into its components.
b)Prepare all the journal entries for fiscal year 2018.
c)Record the journal entry for the exercise of stock warrants on February 22,2021.

Question

Quizplus · Accepted Answer

The Answer of On September 30,2018,Pennsylvania Co.issued $3 million of 10%,10-year convertible bonds maturing on September 30,2028,with semi-annual coupon payments on March 31 and September 30.Each $1,000 bond can be converted into 80 no par value common shares.In addition,each bond included 20 detachable common stock warrants with an exercise price of $20 each.Immediately after issuance,the warrants traded at $5 each on the open market.Gross proceeds on issuance were $4.6 million (including accrued interest).From these proceeds,the company paid underwriting fees of $55,000.Without the warrants and conversion features the bond would be expected to yield 6% annually.Pennsylvania's year-end is December 31.
On February 22,2021,warrant holders exercised one-half of the warrants.The shares of Pennsylvania traded at $44 each on this day.
Required:
a)Determine how Niagara should allocate the $4,600,000 proceeds into its components.
b)Prepare all the journal entries for fiscal year 2018.
c)Record the journal entry for the exercise of stock warrants on February 22,2021.