CALCULATOR STANDARD VIEW PRINTER VERSION BACK NEXT Problem 16-1 The stockholders
ID: 2411330 • Letter: C
Question
CALCULATOR STANDARD VIEW PRINTER VERSION BACK NEXT Problem 16-1 The stockholders' equity section of Swifty Inc. at the beginning of the current year appears below. Common stock, $10 par value, authorized 1,038,000 shares, 327,000 shares issued and outstanding Paid-in capital in excess of par-common stock $3,270,000 657,000 624,000 Retained earnings During the current year, the following transactions occurred 1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at $33. The rights were void after 30 days. The market price of the stock at this time was $35 per share. The company sold to the public a $197,000, 10% bond issue at 104 . The company also issued with each $100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at $31 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8. 2. 3. All but 5,000 of the rights issued in (1) were exercised in 30 days 4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing. 5. During the current year, the company granted stock options for 9,800 shares of common stock to company executives. The company, using a fair value option-pricing model, determines that each option is worth $10. The option price is $31. The options were to expire at year-end and were considered compensation for the current year. 6. All but 980 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contractExplanation / Answer
Answer- A
No.
Account Titles and Explanation
Debit
Credit
1
No Journal Entry Required
2
Cash
204880
Discount on Bonds Payable
7880
Bonds Payable
197000
Paid in Capital - Stock Warrants
15760
(To record the issue of bonds along with stock warrants)
3
Cash (9500 * 33)
313500
Common Stock (9500 * 10)
95000
Paid in Capital in Excess of Par (9500 * 23)
218500
(To record the exercise of right issue)
4
Paid in Capital-Stock Warrants (15760 * 80%)
12608
Cash (1576 *31)
48856
common Stock (1576 * 10)
15760
Paid in Capital in Excess of Par
45704
(To record the exercise of warrants issued)
5
Compensation Expense
98000
Paid in capital-Stock Option
98000
(To record the stock options granted to company executives)
6a
Cash (8820 * 31)
273420
Paid in capital-Stock Option (90% of 98000)
88200
Common Stock (8820 * 10)
88200
Paid in Capital in Excess of Par
273420
(To record the options exercised by company executives)
6b
Paid in capital-Stock Option (10% of 98000)
9800
Compensation Expense
9800
(To record the options expired due to executives failure)
Answer- B:
Swifty Inc.
Balance Sheet
Paid in capital
Common Stock, $10 par share
1,000,000 shares, 346,896 shares issued and outstanding
3468960
Paid in Capital in Excess of Par
1194624
Paid in Capital- Stock warrants
3152
4666736
Retained earnings
624000
Total Stockholders' Equity
5290736
Working Notes:
Journal Entry 1:
When rights are issued, the corporations do not record any journal entry because the rights are issued without any consideration.
Journal Entry 2:
Number of Bonds Issue = Face Value /100 = 197,000 / 100 = 1970
Amount Raised Through Issue = Number of Bonds * 104 = $ 204,880
Allocated to Bonds = 1970 * 96 = 189,120
Allocated to Warrants = 1970 * 8 = 15760
Discount on Bonds Payable = Face value of Bond Issue – Amount Raised =
= (1,970 * 100) – 189,120 = 7,880
Journal Entry 3:
Total Rights Issued = 100,000
Rights Exercised = 100,000 – 5,000 = 95000
Now 10 rights are needed to issue 1 share then Number of Share issued = 95,000/10 = 9500
9,500 shares of face value $10 per shares issued at $ 33 per share.
Journal Entry 4:
Number of stock Warrant issues at the time of Bond Issue = One stock warrant for one bond = 1970 stock warrants
Exercised = 1970 * 80% = 1576
Amount to be received = Warrant exercised * Exercised price = 1576 * 31 = 48,856
Journal Entry 5:
Number of stock options = 9,800
Worth of an stock option = $10
Total Worth = 9800 * 10 = 98,000
Calculation of Number of Shares Outstanding and Paid in capital in excess of Par
Common stock
Paid-in capital in excess of par
At the Beginning of the year
327000
657000
From Right Issue (Journal entry - 3)
9500
218500
From Stock Warrants (Journal entry - 4)
1576
45704
From Stock Warrants (journal Entry- 6)
8820
273420
Total at the end of year
346896
1194624
PLEASE, Rate the solution if its helpful to you ...
No.
Account Titles and Explanation
Debit
Credit
1
No Journal Entry Required
2
Cash
204880
Discount on Bonds Payable
7880
Bonds Payable
197000
Paid in Capital - Stock Warrants
15760
(To record the issue of bonds along with stock warrants)
3
Cash (9500 * 33)
313500
Common Stock (9500 * 10)
95000
Paid in Capital in Excess of Par (9500 * 23)
218500
(To record the exercise of right issue)
4
Paid in Capital-Stock Warrants (15760 * 80%)
12608
Cash (1576 *31)
48856
common Stock (1576 * 10)
15760
Paid in Capital in Excess of Par
45704
(To record the exercise of warrants issued)
5
Compensation Expense
98000
Paid in capital-Stock Option
98000
(To record the stock options granted to company executives)
6a
Cash (8820 * 31)
273420
Paid in capital-Stock Option (90% of 98000)
88200
Common Stock (8820 * 10)
88200
Paid in Capital in Excess of Par
273420
(To record the options exercised by company executives)
6b
Paid in capital-Stock Option (10% of 98000)
9800
Compensation Expense
9800
(To record the options expired due to executives failure)
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