On March 1, 2020, 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, 2020 as Contributed Surplus-Stock Warrants?
A) $ 10,800
B) $ 12,600
C) $ 15,000
D) $ 15,600

Question

Quizplus · Accepted Answer

To calculate the amount to be recorded as Contributed Surplus-Stock Warrants, we first need to determine the fair value of the bonds and the warrants separately, and then allocate the proceeds from the bond issue between them based on their relative fair values.1. Total proceeds from the bond issue = $300,000 * 104% = $312,000.2. Fair value of the bonds without warrants = $300,000 * 95% = $285,000.3. Number of warrants = 25 warrants/bond * 300 bonds = 7,500 warrants.4. Fair value of all warrants = 7,500 warrants * $2.00/warrant = $15,000.5. Total fair value = Fair value of bonds + Fair value of warrants = $285,000 + $15,000 = $300,000.6. The proportion of the total proceeds attributable to the warrants = $15,000 / $300,000 = 5%.7. Therefore, the amount recorded as Contributed Surplus-Stock Warrants = 5% * Total proceeds = 5% * $312,000 = $15,600.