The stockholders\' equity section of Marigold Inc. at the beginning of the curre

Question

The stockholders' equity section of Marigold Inc. at the beginning of the current year appears below Common stock, $10 par value, authorized 928,000 shares, 292,000 shares issued and outstanding Paid-in capital in excess of par-common stock $2,920,000 578,000 582,000 Retained earnings During the current year, the following transactions occurred 1. The company issued to the stockholders 95,000 rights. Ten rights are needed to buy one share of stock at $31. The rights were void after 30 days. The market price of the stock at this time was $33 per share 2. The company sold to the public a $191,000, 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 $29 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8 3. All but 4,750 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 9,100 shares of common stock to company executives. The company, using a fair value option-pricing year. model, determines that each option is worth $10. The option price is $29. The options were to expire at year-end and were considered compensation for the current 6. All but 910 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 contract.

Explanation / Answer

1 Memorandum entry made to indicate the number of rights issued. 2 Cash 198640 [1910bonds * $104] Discount on Bonds Payable* 7,640 Bonds Payable 191,000 Paid-in Capital—Stock Warrants** 15,280 **Allocated to Bonds: $96/($96+$8) X $198,640 = $183,360; Discount = $191,000 – $183,360 = $7640 **Allocated to Warrants: $8/($96+$8) X $198,640 = $15280; 3 Cash* 279,775 Common Stock (9,025 X $10) 90,250 Paid-in Capital in Excess of Par 189,525 *[(95,000 – 4750) rights exercised] ÷ *[(10 rights/share) X $31 = $279,775 4 Paid-in Capital—Stock Warrants ($15,280 X 80%) 12,224 Cash* 44,312 Common Stock (1,528 X $10) 15,280 Paid-in Capital in Excess of Par 41,256 * $191000/$100 per bond *80% = 1,528 *warrants exercised; 1,528 X $29 = $44,312 5 Compensation Expense* 91,000 Paid-in Capital—Stock Options 91,000 *$10 X 9,100 options = $91,000 6 For options exercised: Cash (8190 X $29) 237,510 Paid-in Capital—Stock Options (90% X $91,000) 81,900 Common Stock (8190 X $10) 81,900 Paid-in Capital in Excess of Par 237,510 For options lapsed: Paid-in Capital—Stock Options 9,100 Compensation Expense 9,100 (b) Stockholders’ Equity: Paid-in Capital: Common Stock, $10 par value, authorized 1,000,000 shares, 310743 shares issued and outstanding $3,107,430 Paid-in Capital in Excess of Par* 1,046,291 Paid-in Capital—Stock Warrants* [15280*20%] 3,056 $4,328,000 Retained Earnings 750,000 Total Stockholders’ Equity $5,078,000 *These two accounts often are combined into one category called Addi­tional Paid-in Capital, for financial reporting purposes. Calculations: Common Stock Paid-in Capital in Excess of Par At beginning of year 292,000 shares $578,000 From stock rights (entry #3) 9,025 shares 189,525 From stock warrants (entry #4) 1,528 shares 41,256 From stock options (entry #6) 8190 shares 237,510 Total 310,743 shares $1,046,291

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