A company has issued bonds with a total face value of $5,000,000 with a detachable warrant, The fair value of the warrants amount to $100,000. The company cannot determine the fair value of the bonds without the warrants. What amount, if any, should be allocated to bonds using the incremental method?

• $100,000
• $4,900,000
• $5,000,000
• The amount cannot be determined

Two Identical companies issue stock options to employees. The market price and exercise price are both $20 per share at the time of issue, but the underlying value is substantially more than $20. Company A uses the fair value method for stock options, while company B uses the intrinsic value method. Which effect does the issue of stock options have on each company’s earnings per share (EPS)?

• Company A’s EPS will increase, and company B’s EPS will decrease
• Company A’s EPS will increase, and company B’s EPS will not change
• Company A’s EPS will decrease, and company B’s EPS will decrease
• Company A’s EPS will decrease, and company B’s EPS will not change

Answer rating: 100% (QA)

Answer 1 A detachable warrant is a derivative of a security that give... View the full answer