On March 1, 2014, Ruiz Corporation issued $1,500,000 of 8% nonconvertible bonds at 104, which are...

Question

On March 1, 2014, Ruiz Corporation issued $1,500,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2034. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2014, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2014 as paid-in capital from stock warrants?

Robert · Accepted Answer

# bonds issued = $1500000 bonds 
Money received on issue of bonds = 1500000*104% = 1560000 
#detachable stock warrants per 1000 bonds is 25 warrants 
# bonds eligible for stock warrant = 1500000/1000 = 1500 bonds 
Total stock warrants = 25*number of bonds eligible for warrant = 25*1500 = 37500 
Fair value of stock warrant = $2 
Total fair value stock warrant = $2*37500 stock warrants = 75000 
Total fair value of issue of bonds without warrants = 1500000*95% = 1425000 
Total fair value of debt and stock warrants = 1425000+75000 = 1500000 
Relative market value of stock warrants = 75000/1500000 * 1560000 = 78000 
Relative market value of stocls warrants should be treated as amount to be recorded as paid on 
capital from stock warrants. Hence, amount of paid in capital from stock warrants is recorded as 
78000

On March 1, 2014, Ruiz Corporation issued $1,500,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2034. In addition, each $1,000 bond was issued with 25 detachable stock warrants,...

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