Choice "A" is correct. The issuance of twenty detachable warrants PER BOND represents 40,000 warrants valued at $10 apiece, or $400,000. The bonds were issued at 110, representing a $200,000 overall premium, which, after deducting the value of the warrants, translates to a $200,000 discount on the bonds. The journal entry to record the issuance would be as follows: | Debit (Dr) | Credit (Cr) |
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| Cash | $ 2,200,000 | | | Discount | 200,000 | | | Bonds payable | | $ 2,000,000 | | APIC - Warrants | | 400,000 |
The journal entry is supported by the following schedule. Bonds | 2,000 | | Denomination | × $1,000 | → $2,000,000 | Price | 110 | | Proceeds ($2,000,000 × 1.10) | $2,200,000 | | Warrants | 20 | | Bonds | 2,000 | | Market price | $10.00 | ($1000 × 1%) | APIC - Warrants | $400,000 | (20 × 2,000 × $10) |
Carrying value of bonds $2,200,000 - $400,000$1,800,000Choices "c", "b", and "d" are incorrect, per above.
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