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On May 1, 2017, Durban Ltd.issued $500,000, 10 year, 7% bonds at 103.Twenty detachable warrants were attached to each $1,000 bond, which entitled the holder to purchase one of Durban's no par value common shares for $40.At this time, similar bonds without warrants were selling at 96.It was determined that the fair value of Durban's common shares was $35, but the value of the warrants was NOT determinable.Durban is a private corporation that follows ASPE, but does NOT use the residual method.
-On May 1, 2017, Durban should credit Bonds Payable for
A)$515,000.
B)$500,000.
C)$480,000.
D)cannot be determined from the information given.

Question

Quizplus · Accepted Answer

The carrying value of the bonds with detachable warrants is $1,030 ($1,000 x 103%). Since there are 20 detachable warrants attached to each $1,000 bond, a total of 20 x $40 = $800 must be attributed to the detachable warrants. The remaining $230 ($1,030 - $800) is the carrying value of the bonds without the warrants. Thus, the portion of the proceeds from the bond issue attributable to the bonds is $230/$990 x $500,000 = $114,646.46. The portion of the proceeds from the bond issue attributable to the detachable warrants is $800/$990 x $500,000 = $404,040.40. Therefore, the Bonds Payable account should be credited for the total carrying value of the bonds issued, which is $114,646.46 + $404,040.40 = $518,686.86. However, since the bonds were issued at a premium of 3% (103-100), this premium must be amortized over the term of the bonds. Therefore, the premium for the first year is $15,000 ($500,000 x 3% x 1/10), and the Bonds Payable account should be credited for the net proceeds of the bonds, which is $518,686.86 - $15,000 = $503,686.86. Rounded to the nearest thousand, the answer is $515,000.

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