Question

Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Ray's common stock.
Total proceeds from the issue amounted to $240,000.
The market value of each warrant was $2, and the market value of the bonds without the warrants was $196,000.
The bonds were issued at a discount of

A. $0
B. $678
C. $4,000
D. $33,898

Answer 1

Answer:

The discount on the bonds is $678

Explanation:

Given:

Face value of bonds                                                      $200000

Each $1000 bond contained detachable stock warrants for 100 shares of Ray's common stock

Total proceeds from the issue                                       $240000

Market value for each warrant                                       $2

market value of the bonds without the warrants         $196000

Therefore market value of warrants = (200 bonds) × (100 warrants/bond)($2) = $40000

total market value of bonds = Market value for warrant + Market value of the bonds without the warrants = $40000 + $196000 = $236000

Allocation amount of bonds = (Total proceeds from the issue ×  Market value of the bonds without the warrants) / total market value of bonds

= $240,000 × $196,000 / $236,000 = $199,322

The discount on the bonds = Face value of bonds - allocation to bonds = $200,000 - $199,322 = $678

The discount on the bonds is $678