When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue?
A) The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values.
B) The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values.
C) A nominal amount is allocated to the warrants.
D) All of the proceeds are allocated to the bonds.

Question

Quizplus · Accepted Answer

The appropriate accounting for the cash proceeds from the bond issue with detachable warrants is to allocate the proceeds between the bonds and the warrants on the basis of their relative market values. This is because the fair value of the warrants is readily determinable and separable from the fair value of the bonds. As such, the allocation should be based on the fair value of each component at the time of issuance.

When Bonds Include Detachable Warrants, What Is the Appropriate Accounting