During 2017, Khartoum Corp.issued four hundred $1,000 bonds at 104.One detachable warrant, entitling the holder to purchase 15 of Khartoum' common shares, was attached to each bond.At the date of issuance, the market value of the bonds, without the warrants, was 96.The market value of each warrant was $40.Using the relative fair value method, what amount should Khartoum credit to Bonds Payable from the proceeds?
A)$416,000
B)$400,000
C)$399,360
D)$384,000

Question

Quizplus · Accepted Answer

First, we need to calculate the total proceeds from the issuance of the bonds, which is:
$1,000 x 400 x 1.04 = $416,000
Next, we need to determine the fair value of the detachable warrants. Since each warrant can purchase 15 common shares, the fair value of each warrant can be calculated as:
15 x Market value per share - Exercise price per share = 
15 x MV - $0 (since exercise price is not given) = 15 x MV
Therefore, the total fair value of the warrants is:
$40 x 400 = $16,000
To allocate the proceeds between Bonds Payable and the Warrant Liability, we need to first determine the ratio of the fair value of the warrants to the fair value of the bonds without the warrants:
$16,000 / (400 x $96) = 0.4167
This means that 41.67% of the total proceeds should be allocated to the warrant liability, and the remaining to Bonds Payable. Therefore:
Bonds Payable: $416,000 x (1 - 0.4167) = $399,360
Warrant Liability: $416,000 x 0.4167 = $173,640
Thus, the amount that Khartoum should credit to Bonds Payable is $399,360.