CALCULATOR STANDARD VIEW PRINTER VERSION BACK NEXT Problem 1

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 contract

Solution

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

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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)