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Exercise 16-16On September 1, 2017, Blossom Corp. sold at 101 (plus accrued interest) 5,000 of its $1,000 face value, 10-year, 8%, non-convertible bonds with detachablestock warrants. Each bond carried 2 detachable warrants; each warrant was for one common share at a specified option price of $8 per share. Shortly afterissuance, the warrants were selling for $4 each. Assume that no fair value is available for the bonds. Interest is payable on December 1 and June 1. BlossomCorp. prepares its financial statements in accordance with ASPE.Prepare in general journal format the entry to record the issuance of the bonds under both options available under ASPE. (Credit account titles areautomatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles andenter 0 for the amounts.)DateAccount Titles and ExplanationDebitCreditResidual method:September 1, 2017(To record the issuance of the bonds)Allocation of zero to equity:(To record the issuance of the bonds)From the perspective of a creditor, what is the effect of each option on Blossom Corp.’s debt to total assets ratio.Measuring the equity component at zero results in adebt to total assets ratio compared with the residual method.
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