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Homework answers / question archive / On May 1, 2021, Vaughn Manufacturing issued $4400000 of 8% bonds at 103, which are due on April 30, 2031
On May 1, 2021, Vaughn Manufacturing issued $4400000 of 8% bonds at 103, which are due on April 30, 2031. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Vaughn's common stock, $15 par value, were attached to each $1000 bond. The bonds without the warrants would sell at 96. On May 1, 2021, the fair value of Vaughn's common stock was $34 per share and of the warrants was $2.
On May 1, 2021, Vaughn should record the bonds with a
premium of $132000.
discount of $49280.
discount of $44000.
discount of $176000.
Answer
So, the correct option is 2nd "discount of $49,280".
Explanation
Computation of Discount on Bond:
Issue price = $4,400,000
Value of bonds without warrant = $4,400,000*96/100 = $4,224,000
Issue price of bonds with warrants = $4,400,000*103/100 = $4,532,000
Discount on Bond = $4,400,000 - [($4,224,000/$4,400,000)*$4,532,000]
= $4,400,000 - $4,350,720
Discount on Bond = $49,280
