My client issued put warrants in connection with a loan agreement. My question is 1) what the initial journal entry would be on the issue date of the warrants and 2) what the journal would be when the Holder exercises the right to require my client to purchase the warrants in the amount of the Buyout Fee
Warrant info:
# of shares = 2,000,000
class of shares = Preferred series A
Initial exercise price = $.20
Buyout fee = $375,000
Under FASB’s
Since accounting for warrants is complex, you should read through ASC 480 to determine the treatment. If you do not have access to www.fasb.org, your client's
you have to black scholes the warrants and then allocate the proceeds of the debt. BUT if the preferred shares are redeemable (even in the future), you have to record them as a liability. AND you will need to revalue the warrants each year and take the change in value to the P&L directly for that year. AND the discount on the debt (the value of the warrants) is amortized over the life of the loan as additional interest expense. BUT if the debt is convertible into shares you will have a beneficial conversion feature to contend with as well which will result in even more interest expense to deal with. the interest charges from the beneficial conversion feature and the value of the warrants will be pretty large.
