Detachable warrant accounting
/What is the Accounting for Detachable Warrants?
A detachable warrant is a derivative associated with a debt security that gives its owner the right to purchase issuer shares at a fixed exercise price. When these warrants are issued, allocate the proceeds from the sale of a debt instrument with detachable warrants between the two items, based on their free-standing relative fair values on the issuance date. Allocate the portion of the proceeds assigned to the warrants to paid-in capital, and the remainder to the debt instrument.
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Example of Detachable Warrant Accounting
Hostetler Corporation issues $1 million of convertible debt that includes 200,000 detachable warrants. The fair value of the convertible debt without the warrants is $900,000 and the fair value of the detachable warrants is $300,000 without the debt. Based on their relative fair values, Hostetler assigns $750,000 to the debt (calculated as $900,000 ÷ ($900,000 + $300,000)) and $250,000 to the detachable warrants (calculated as $300,000 ÷ ($900,000 + $300,000)). The resulting journal entry is:
| Debit | Credit | |
| Cash | $1,000,000 | |
| Additional paid-in capital | $250,000 | |
| Debt | 750,000 |