Companies bundle stock purchase warrants with debt securities to increase the stock's value to investors. The stock purchase warrant gives owners the right to purchase shares of common stock at a predetermined price.
To account separately for stock purchase warrants, a market value must be established for both the stock purchase warrant and the debt security with which it is issued. Accountants determine the market values for the debt security by reviewing the stock market transactions for debt securities without stock purchase warrants. The accountants determine the market value of the stock purchase warrant by reviewing the securities market to determine at what price stock purchase warrants are trading.
The market value of the stock purchase warrant and the security are summed up and a percent of the total is calculated for each. The percent is multiplied by the original issue price to determine the proceeds applicable to each. The accountant records the issuance of the security and the stock purchase warrant by debiting "Cash" for the amount received. The accountant credits "Bonds Payable" for the value determined and "Additional Paid In Capital" for the value applied to the warrant.
Warrant Exercise Entry
When the stock purchase warrant is exercised, the holder purchases shares of stock at the price specified on the warrant. The accountant records the transaction as a stock sale and debits "Cash" for the amount received, credits "Common Stock" for the par value of the stock issued and credits "Paid in Capital" for the amount paid above the stock’s par value.
When the debt security and stock purchase warrant are sold to an investor, only balance sheet accounts are affected. The balance sheet lists assets, liabilities and equity accounts. This transaction increases the Cash balance, increases the Bonds Payable balance and increases the Paid In Capital balance. Cash is an asset. Bonds Payable is a liability. Paid In Capital is an equity.
When the holder exercises the stock purchase warrant, only asset and equity accounts on the balance sheet are affected. The transaction increases the Cash balance, increases the balance of Common Stock and increases the Paid in Capital balance.
- CPAClass.com: Generally Accepted Accounting Principles in the United States
- The CPA Journal: Accounting for the Issuance of Convertible Securities
- Accounting Financial, Tax: Types of Preferred Stock [and Their Journal Entries]
- Upcounsel.com. "Stock Warrants: Everything You Need to Know." Accessed July 28, 2020.