Question

P16.5 The shareholders' equity section of Finley Inc. at the beginning of the current year is as follows:

Common shares, 1,000,000 shares authorized, 300,000 shares issued and outstanding		$3,600,000
Retained earnings		570,000

During the current year, the following transactions occurred.

1. The company issued 100,000 rights to the shareholders. Ten rights are needed to buy one share at $32 and the rights are void after 30 days. The shares' market price at this time was $34 per share.
2. The company sold the public a $200,000, 10% bond issue at par. The company also issued with each $100 bond one detachable stock purchase warrant, which provided for the purchase of common shares at $30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8.
3. All but 10,000 of the rights issued in item 1 were exercised in 30 days.
4. At the end of the year, 80% of the warrants in item 2 had been exercised, and the remaining were outstanding and in good standing.
5. During the current year, the company granted stock options for 5,000 common shares to company executives. The company, using an options pricing model, determined that each option is worth $10. The exercise or strike price is $30. The options were to expire at year end and were considered compensation for the current year.
6. All but 1,000 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.

Instructions

a. Prepare general journal entries for the current year to record each of the transactions. Assume the company follows IFRS.

b. Prepare the shareholders' equity section of the SFP at the end of the current year. Assume that retained earnings at the end of the current year is $750,000.

c.  Assume instead that the executives in items 5 and 6 had fulfilled the employment contract, and that the stock options expired because the share price was lower than the exercise or strike price. Would it be incorrect to have recorded compensation expense related to the expired stock options, during the service period? Why or why not? Would the journal entry to record the expiration be any different than the journal entry for item 6 recorded in part (a)? If so, prepare the journal entry.

Answer 1

Step 1:

Common stock is representation of ownership in a corporation by stockholders which have voting rights.

Paid in capital in excess of par is the amount received in excess of par value of common stock.

Step 2:

(a) 1. Memorandum entry made to indicate the number of rights issued including full details as to characteristics. 2. Cash ....... 200,000 Bonds Payable ($200,000 x 0.96) Contributed Surplus-Stock Warrants 192,000 8,000 3. Cash *.......... Common Shares. 288,000 288,000 *[(100,000 - 10,000) rights exercised] = (10 rights/share) < $32 = $288,000 6,400 4. Contributed Surplus-Stock Warrants ..... ($8,000 X 80%) Cash*............ Common Shares. 48,000 54,400 *.80 X $200,000/$100 per bond = 1,600 warrants exercised; 1,600 X $30 = $48,000 50,000 5. Compensation Expense*. Contributed Surplus - Stock Options. 50,000 *$10 X 5,000 options = $50,000 6. For options exercised: Cash (4,000 X $30)..... 120,000 Contributed Surplus-Stock Options ........ 40,000 (80% X $50,000) Common Shares...... 160,000 For options lapsed: Contributed Surplus-Stock Options ....... 10,000 Compensation Expense* 10,000

(b) Shareholders' Equity: Share Capital: Common Shares, authorized 1,000,000 shares, 314,600 shares issued and outstanding Contributed Surplus-Stock Warrants* Retained Earnings Total Shareholders' Equity * $8,000 - $6,400 $4,102,400 1,600 $4,104,000 750,000 $4,854,000 Calculations: Common Shares Number Amount At beginning of year From stock rights (entry #3 above) From stock warrants (entry #4 above) From stock options (entry #6 above) Total 300,000 9,000 1,600 4,000 314,600 $3,600,000 288,000 54,400 160,000 $4,102,400 (c) If the executive had fulfilled the employment contract and the stock options expired, the following journal entry would be recorded for the expiration. Contributed Surplus-Stock Options .... 10,000 Contributed Surplus-Expired Options 10,000