Question

On March 1, 2010, Ruiz Corporation issued $800,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2030. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2010, the fair market value of Ruiz's common stock was $40 per share and the fair market value of the warrants was $2.00. What amount should Ruiz record on March 1, 2010 as paid-in capital from stock warrants?

a. $28,800
b. $33,600
c. $41,600
d. $40,000

Answer 1

Ruiz Corporation should record $41,600 as paid-in capital from stock warrants on March 1, 2010.

Step-by-step explanation:

The amount that Ruiz Corporation should record on March 1, 2010 as paid-in capital from stock warrants is $41,600.

To calculate the paid-in capital from stock warrants, we need to determine the fair value of the stock warrants. Each bond was issued with 25 detachable stock warrants, which can be exercised to purchase one share of Ruiz common stock for $50 each.

Since the fair market value of the stock warrants on March 1, 2010 was $2.00, we can calculate the total fair value of the stock warrants by multiplying the number of stock warrants (25) by the fair value per warrant ($2.00). This gives us a total fair value of $50.

The difference between the fair value of the stock warrants ($50) and the fair value of the bonds without warrants ($950, which is 95% of $1,000) is the amount that should be recorded as paid-in capital from stock warrants. Therefore, the paid-in capital from stock warrants on March 1, 2010 is $50 - $950 = $41,600.