Learn stock warrants accounting with bond issuance, exercise and expiration journal entries. Professor Farhat compares the proportional method and incremental method using detachable warrants and a $215,000 financing example.

A stock warrant gives its holder the right to buy shares at the exercise price during the contractual exercise period. Detachable warrants can be transferred separately from the bonds. This intermediate accounting lesson follows the issuer's accounting for warrants assumed to qualify as equity.

CHAPTERS
00:00 What is a stock warrant?
00:48 Why companies issue warrants
02:05 Detachable vs. nondetachable warrants
02:41 Allocating bond and warrant proceeds
03:09 Course resources
03:49 When to use the proportional method
04:01 Bond and warrant example data
05:04 Relative fair value allocation
05:59 Bond and warrant issuance entries
06:57 Exercising 150 of 200 warrants
08:08 Expired warrants: read arithmetic correction
08:56 Incremental method example
09:33 Allocate known warrant value and record entries

PROPORTIONAL METHOD: BOTH FAIR VALUES KNOWN
The example has $200,000 face amount of bonds: 200 bonds at $1,000 each, with one warrant per bond. The bonds' standalone fair value is $204,000; 200 warrants at $70 have a $14,000 fair value. Total standalone fair value is $218,000, while actual cash proceeds are $215,000.

Allocate the actual proceeds using relative fair values:
• Bonds: $215,000 × $204,000 / $218,000 = $201,193, rounded.
• Warrants: $215,000 × $14,000 / $218,000 = $13,807, rounded.
Combined issuance entry: debit Cash $215,000; credit Bonds Payable $200,000, Premium on Bonds Payable $1,193, and Paid-in Capital—Stock Warrants $13,807. Keep full precision until rounding the allocations.

EXERCISE AND EXPIRATION: CORRECTED AMOUNTS
Using the lecture's rounded initial warrant balance, exercise of 150 warrants at $65 gives:
Debit Cash $9,750.
Debit Paid-in Capital—Stock Warrants $10,355.25.
Credit Common Stock $150 ($1 par × 150 shares).
Credit Paid-in Capital in Excess of Par—Common $19,955.25.

Correction at 08:40: the remaining 50 warrants represent 25% of $13,807, or $3,451.75, not $2,897.75. If they expire unexercised, debit Paid-in Capital—Stock Warrants $3,451.75 and credit Paid-in Capital—Expired Stock Warrants $3,451.75. This transfer stays within equity; it is not revenue or a gain.

INCREMENTAL METHOD: ONE FAIR VALUE KNOWN
In the second example, only the warrants' $18,000 fair value is given. Assign $18,000 to warrants and the remaining $197,000 to bonds. Combined entry: debit Cash $215,000 and Discount on Bonds Payable $3,000; credit Bonds Payable $200,000 and Paid-in Capital—Stock Warrants $18,000.

STUDY CLARIFICATIONS
• A warrant is a purchase right, not ownership of the shares before exercise. Exercising these warrants issues new shares; it does not extinguish the bonds.
• Equity classification is an assumption in these examples. Actual contract terms must be evaluated; some warrants require liability accounting. Detachability alone does not establish equity classification.
• The statement about ignoring nondetachable warrants is a classroom simplification. Embedded features and applicable accounting requirements still need review. Employee compensation and shareholder rights offerings are separate fact patterns.

CONTINUE STUDYING
Convertible securities and warrants:
https://www.youtube.com/playlist?list=PLTGaFJzXiOCI
Intermediate accounting course:
https://www.youtube.com/playlist?list=PLxP0KZzCGFYN52Yailthutp_OIXFAED9P
Courses and practice resources: https://farhatlectures.com

Warrant classification reference (SEC staff discussion of ASC 815-40):
https://www.sec.gov/newsroom/speeches-statements/accounting-reporting-warrants-issued-spacs

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