On August 1, 2018, Limbaugh Communications issued $22 million of11% nonconvertible bonds at 105. The bonds are due on July 31,2038. Each $1,000 bond was issued with 40 detachable stockwarrants, each of which entitled the bondholder to purchase, for$50, one share of Limbaugh Communications’ no par common stock.Interstate Containers purchased 20% of the bond issue. On August 1,2018, the market value of the common stock was $48 per share andthe market value of each warrant was $10. In February 2029, whenLimbaugh’s common stock had a market price of $62 per share and theunamortized discount balance was $2 million, Interstate Containersexercised the warrants it held. Required: 1. Prepare the journalentries on August 1, 2018, to record (a) the issuance of the bondsby Limbaugh and (b) the investment by Interstate. 2. Prepare thejournal entries for both Limbaugh and Interstate in February 2029,to record the exercise of the warrants.
