( W arrant s Issue d wit h Bond s an d Convertibl e Bonds ) Incurring long-term debt with an arrangement whereby lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding is a frequent corporate financing practice. In some situations, the result is achieved through the issuance of convertible bonds; in others, the debt instruments and the warrants to buy stock are separate.
(a) (1) Describe the differences that exist in current accounting for original proceeds of the issuance of convertible bonds and of debt instruments with separate warrants to purchase common stock.
(2) Discuss the underlying rationale for the di f fe r ences described in (a)(1) above.
(3) Summarize the a r guments that have been p r esented in favor of accounting for convertible
bonds in the same manner as accounting for debt with separate warrants.
(b) At the start of the yea r , Huish Company issued $18,000,000 of 12% bonds along with detachable
warrants to buy 1,200,000 sha r es of its $10 par value common stock at $18 per sha r e. The bonds
matu r e over the next 10 years, starting one year f r om date of issuance, with annual maturities of
$1,800,000. At the time, Huish had 9,600,000 sha r es of common stock outstanding. The company
r eceived $20,040,000 for the bonds and the warrants. For Huish Compan y , 12% was a r elatively low
bor r owing rate. If o f fe r ed alone, at this time, the bonds would have sold in the market at a 22%
discount. P r epa r e the journal entry (or entries) for the issuance of the bonds and warrants for the
cash consideration received.