Notes & Bonds Payable Flashcards
A company issues 1,000 bonds payable each with a face value of $1,000. Each bond also has 3 stock options. These options allow the buyer to acquire a share of the company’s stock for $22 per share at any time over the next 24 months. Similar stock options are currently being actively traded on the market at $7 each. The company receives total proceeds for these bonds and options of $1,015,000. By what amount (rounded) should the company increase its reported liability balance?
When a company buys or sells more than one thing, the accounting should allocate the reported amounts based on the relative values. Here, the value of the stock options is know (3 options per bond valued at $7 each or $21 in total). The value of bonds is not provided. The face value is $1,000 but the fair value is not given. If only one of the values is known, that value is used and the residual amount goes to the other item or items. The stock options are assigned a reported value of $21,000 ($21 value per bond times 1,000 bonds). The remainder of the $1,015,000 amount received is assigned to the bond ($1,015,000 less $21,000 or $994,000)
