Wolf Company issued 1,000 of its $1,000 face amount, 20-year bonds on June 30, 2010, for $1,020,000. Each bond carries five detachable stock purchase warrants, each of which entitles the holder to purchase for $60 one share of Wolf’s common stock. On June 30, 2010, the market prices were $50 per share of Wolf’s common stock and $5 per warrant. In its June 30, 2010, balance sheet, at what amount should Wolf report the carrying amount of the bonds?
a. $995,000
b. $1,000,000
c. $1,020,000
d. $1,045,000
995000
To determine the carrying amount of the bonds on the balance sheet, you need to calculate the fair value of the bonds and subtract any unamortized discount or add any unamortized premium.
In this case, the bonds were issued on June 30, 2010, for $1,020,000. Each bond carries five detachable stock purchase warrants. Each warrant allows the holder to purchase one share of Wolf's common stock for $60.
To calculate the fair value of the bonds, you need to consider the value of the bonds and the value of the detachable stock purchase warrants.
The value of the bonds can be calculated by subtracting the fair value of the detachable stock purchase warrants from the total proceeds received from issuing the bonds. In this case, each warrant is worth $60, and there are five warrants per bond, so the total value of the detachable stock purchase warrants is $300 per bond ($60 * 5 warrants).
Therefore, the value of the bonds is $1,020,000 - $300 = $1,019,700.
Since the fair value of the bonds matches the proceeds received from issuing the bonds, there is no discount or premium to be amortized. Therefore, the carrying amount of the bonds on the June 30, 2010, balance sheet should be equal to the fair value of the bonds, which is $1,019,700.
None of the answer choices provided matches this amount exactly. It's possible that there is a rounding difference involved, or there may be additional information in the question that needs to be incorporated into the calculation.