On April 1, 2018, Austere Corporation issued $370,000 of 11% bonds at 106. Each $1,000 bond was sold with 40 detachable stock warrants, each permitting the investor to purchase one share of common stock for $15. On that date, the market value of the common stock was $11 per share and the market value of each warrant was $4. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?

Answer: $347,800 is the amount that will be recorded as increase in liabilities.

Explanation:

Each bond was sold for $1,000 x 1.16 = $1,070.

It should be noted that the proceeds from sale of the issue be divided between Bond and Detachable Warrants.

Number of bonds = $370,000 : $1,000 = 370

Total market value = $370,000 x 106 : 100 = $392,200

Market value per warrant = $4

Total market value for 30 warrants = 30 x $4 x 370 = $44,400

Using residual approach;

Market Value of Bond = Total Proceeds - Market Value of warrants

= $ (392,200 - 44,400) = $347,800

$347,800 is the amount that will be recorded as increase in liabilities.