What is Bonds with detachable warrants?
In short
When bonds are issued with detachable stock warrants that can be traded separately, the proceeds are allocated between the bonds and the warrants, usually by their relative fair values. The warrants' share goes to equity (additional paid-in capital).
Key takeaways
- The amount allocated to the warrants usually creates a discount on the bonds, amortized into interest expense.
- If only one fair value is known, that item gets its fair value and the other gets the rest.
- Nondetachable warrants are not accounted for separately.
Where it's tested
FAR: Long-Term Debt (Bonds & Notes) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Bonds with detachable warrants are issued for $1,050,000. Without the warrants, the bonds would have a fair value of $900,000, and the warrants have a fair value of $100,000. How much of the proceeds is allocated to the warrants?