Reference no: EM13862489

Debt with Detachable Stock Warrants

Respond to the following. Submit journal entries in a table in MS Word and written segments in the same Word document. Do not submit two separate documents, as only one document can be accepted. For written answers, please make sure your responses are well written, formatted per the APA Requirements and have proper citations, if applicable.

Companies typically practice financing strategy whereby they incur long-term debt with an arrangement for lenders to receive an option to buy common stock during all or a portion of the time the debt is outstanding. In some situations, companies issue convertible bonds. In others, the debt instruments and the warrants to buy stock are separate. In the latter scenario, this is detachable stock warrants.

Required:

1.

a. Explain the differences that exist in current accounting for original proceeds of the issuance of convertible bonds and debt instruments with detachable warrants to purchase common stock.

b. Explain the underlying rationale for the differences described in Requirement 1a.

c. Summarize the arguments for the alternative accounting treatment.

2. At the start of the year, Triple T Company issued $6 million of 7% notes along with warrants to buy 400,000 shares of its $10 par value common stock at $18 per share. The notes mature over the next 10 years, starting one year from date of issuance, with annual maturities of $600,000. At the time, Triple T had 3,200,000 shares of common stock outstanding, and the market price was $23 per share. The company received $6,680,000 for the notes and the warrants. For Triple T, 7% was a relatively low borrowing rate. If offered alone, at this time, the notes would have been issued at a 20 to 24% discount.

Prepare journal entries for the issuance of the notes and warrants for the cash consideration received. Notes would have been issued at a 20% to 24% discount.