On January 2, 2016, Rushmore, Inc. issued 8,000 bonds at $1,080 each. Each bond contains 40 stock warrants, each of which gives the owner the right to purchase one share of Rushmore $10 par value common stock at $50. The current selling price of common stock is $40 per share. Rushmore bonds without stock warrants are currently selling for $1,025
Required:
1. Prepare the journal entry to record the sale of the bonds if the warrants are nondetachable.
2. Prepare the journal entry to record the sale of the bonds if the warrants are detachable using the incremental method.
3. Prepare the journal entry to record the exercise of all warrants on October 5, 2020, when the market price of the stock was $60, using the incremental method.
What will be an ideal response?
Answer:
1.
Date
Account
Debit
Credit
January 1, 2016
Cash
8,640,000
Bonds Payable
8,000,000
Bond Premium
640,000
2.
Date
Account
Debit
Credit
January 1, 2017
Cash
8,640,000
Bonds Payable
8,000,000
Bonds Premium
200,000
Paid-in Capital—Stock Warrants
440,000
3.
Date
Account
Debit
Credit
October 5, 2020
Cash
16,000,000
Paid-in Capital—Stock Warrants
440,000
Common Stock
3,200,000
Paid-in Capital—Common Stock
13,240,000
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