Bonds with warrants

On September 30, 2018, Desmond Co. issued a $2 million, 8%, 10-year convertible bond maturing on September 30, 2028, with semi-annual coupon payments on March 31 and September 30. Each $1,000 bond can be converted into 80 no par value common shares. In addition, each $ 1,000 bond included 20 detachable common stock warrants with an exercise price of $20 each. Immediately after issuance, the warrants traded at $4 each on the open market. Gross proceeds on issuance were $2,555,000. Without the warrants and conversion features the bond would be expected to yield 6% annually. Desmond's year-end is December 31. On February 22, 2021, warrant holders exercised one-half of the warrants. The shares of Desmond traded at $44 each on this day.

Required:

a.Determine how Desmond should allocate the $2,555,000 proceeds into its components.

b.Assume that the warrants are initially recognized at the market value of $4 each.

c.Prepare the journal entries for fiscal year 2018.

d.Record the journal entry for the exercise of stock warrants on February 22, 2021.