Lesson 29 Flashcards
What is a stock warrant?
it is a certificate entitling the holder to acquire shares of stock at a certain price within a stated period.
What is the difference between a stock warrant and convertible bonds
with a stock warrant, the holder has to pay a certain amount of money to obtain the shares.
Why do companies include warrants when issuing securities.
to make the security more attractive.
What is stock options
stock warrants that companies give to executives and employees as a form of compensation
What does it mean when warrants are issued with other securities.
they are basically long term options to buy common stock at a fixed price
What is a stock right?
present stockholders have the privilege to purchase newly issued shares in proportion to their holdings. It saves them from suffering a dilution of voting rights without their consent.
What is a detachable stock warrant?
it can be detached or separated from the stock and traded as a separate security
With the sale of debt with detachable stock warrants what happens to the proceeds from the sale.
They are allocated between the two securities. a bond and a warrant.
What are the two methods of allocating the proceeds from the sale of debt with detachable stock warrants.
the proportional method
and incremental methods
Lake Norman Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the Lake Norman bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants?
$20,500
Correct. When bonds are issued with detachable warrants, two securities are created. The value of each security is allocated between the two using the proportional method which uses the fair value of both securities, if available, to make the allocation of proceeds. The amount that should be allocated to the warrants is calculated as: $205,000 x [( $20,000 / ($180,000 + $20,000)] = $20,500.
On what should the allocation of proceeds from the sale of debt with detachable stock warrants be based?
Aggregate fair market value of the bonds and the warrants
Correct. When bonds are issued with detachable warrants, two securities are created. The value of each security is allocated between the two using the proportional method which uses the fair value of both securities, if available, to make the allocation of proceeds.
When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair value of the warrants, to which account should the excess be credited?
Premium on bonds payable
Correct. When bonds with detachable warrants are issued, two securities are created. However, until the warrants are exercised, they are reported on the balance sheet in the stockholders’ equity section at the value of the cash attributed to the warrants. Therefore, any difference in proceeds and the face value of the bond will be reported as either a premium or discount on the bond payable and amortized over the life of the bond.
