Tutte Company issued 3,000 of its $ 1,000, 9%, five- year par value bonds. Bond interest is paid annually on December 31. The market rate on the date of issue was 15%. The market price of Tutte Company common shares on the date the bonds were issued was $ 60 per share. The bonds were sold with 18,000 war-rants to acquire 18,000 shares of the company’s $ 1 par value common stock for $ 60 per share. Tutte Company has existing bonds outstanding that trade without warrants at $ 750. There are other Tutte Company warrants outstanding that trade for $ 60 each. The market value of the warrants is considered to be more reliable than the fair value of the company’s outstanding bonds.
Required
a. Determine the issue price of the bonds.
b. Prepare the journal entry to record issuance of the bonds assuming that the warrants are non detachable.
c. Prepare the journal entry to record the issuance of the bonds assuming that the warrants are detachable using the proportional method.
d. Prepare the journal entry to record the issuance of the bonds assuming that the warrants are detachable using the incremental method.
e. Assuming that the proportional method is used, prepare the journal entry required to record the exercise of all warrants.
f. Assuming that the incremental method is used, prepare the journal entry required to record the exercise of all warrants.
g. Compare the financial statement effects of the bonds and detachable warrants using the proportional versus the incremental methods.