Question

P16-1 (Entries for Various Dilutive Securities) The stockholders' equity section of Martino Inc. at the beginning of the current year appears below. Common stock, authorized 1,000,000 shares, 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 to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at $32. The rights were void after 30 days. The market price of the stock at this time was $34 per share.

2. The company sold to the public a $200,000, 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 $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 (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 10,000 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 $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 the transactions listed above. Assume company follows IFRS.

b) Prepare the stockholders' equity section of the balance sheet 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 item 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

Part A

No.	General journal	Debit	Credit
1	Memorandum entry
	(to indicate the number of rights issued including full details as to characteristics)
2	Cash	200000
	Bonds Payable ($200,000 * 0.96)		192000
	Contributed Surplus—Stock Warrants (balancing figure)		8000
	(To record the issue of bonds)
3	Cash [(100,000 – 10,000) rights exercised]/ (10 rights/share) * $32	288000
	Common Shares		288000
	(to record the right issue exercised)
4	Contributed Surplus—Stock Warrants ($8,000 X 80%)	6400
	Cash (0.80 X $200,000/$100 per bond* $30)	48000
	Common shares		54400
	(to record the stock warrants exercised)
5	Compensation Expense ($10 X 5,000 options)	50000
	Contributed Surplus –Stock Options		50000
	(to record stock options granted at fair value)
6	For options exercised:
	Cash (4,000 X $30)	120000
	Contributed Surplus—Stock Options (80% X $50,000)	40000
	Common Shares		160000
	For options lapsed:
	Contributed Surplus—Stock Options	10000
	Compensation Expense		10000

Part B

Shareholders’ Equity:
Share Capital:
Common Shares, authorized1,000,000 shares, 314,600 shares issued and outstanding	4102400
Contributed Surplus—Stock Warrants (8000-6400)	1600	4104000
Retained Earnings		750000
Total Shareholders’ Equity		4854000

	Common shares
	Number	Amount
At beginning of year	300000	3600000
From stock rights	9000	288000
From stock warrants	1600	54400
From stock options	4000	160000
Total	314600	4102400

Part C

No.	General journal	Debit	Credit
1	Contributed Surplus—Stock Options	10000
	Contributed Surplus–Expired Options		10000