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Chapter 16: Q10E (page 877)

Issuance and Exercise of Stock Options) On November 1, 2017, Columbo Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company鈥檚 \(10 par value common stock. The options were granted on January 2, 2018, were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at \)40, and the fair value option-pricing model determines the total compensation expense to be \(450,000.All of the options were exercised during the year 2020: 20,000 on January 3 when the market price was \)67, and 10,000 on May 1 when the market price was $77 a share.

Instructions

Prepare journal entries relating to the stock option plan for the years 2018, 2019, and 2020. Assume that the employee performsservices equally in 2018 and 2019.

Short Answer

Expert verified

Journal entries are recorded in Step 2.

Step by step solution

01

Explanations on Stock Options

Stock options provides a right to the investor related to purchase and sale of security (stock) at pre-determined price and period.

02

Journal entries

Date

Accounts and Explanations

Debit

Credit

2/1/18

No entry

31/12/18

Compensation Expense

$225,000

Paid-in Capital鈥擲tock Options

$225,000

To record compensation expense for 2008

(50% X $450,000)

31/12/19

Compensation Expense

225,000

Paid-in Capital鈥擲tock Options

225,000

To record compensation expense for 2009

3/1/20

Cash (20,000 X $40)

800,000

Paid-in Capital鈥擲tock Options

($450,000 X 20,000/30,000)

300,000

Common Stock (20,000 X $10)

200,000

Paid-in Capital in Excess of Par

900,000

(To record issuance shares)

1/5/20

Cash (10,000 X $40)

$400,000

Paid-in Capital鈥擲tock Options ($450,000 X 10,000/30,000)

$150,000

Common Stock

$100,000

Paid-in Capital in Excess of Par 鈥� Common stock

$450,000

(To record issuance of shares)

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Most popular questions from this chapter

Financial Statement Analysis Case

Ragatz, Inc.

Ragatz, Inc., a drug company, reported the following information. The company prepares its financial statements in accordance with GAAP.

2017 (000)

Current liabilities

\(554,114

Convertible subordinated debts

648,020

Total liabilities

1,228,313

Stockholder鈥檚 equity

176,413

Net income

58,333

Analysts attempting to compare Ragatz to drug companies that issue debt with detachable warrants may face a challenge due to differences in accounting for convertible debt.

Instructions

(a) Compute the following ratios for Ragatz, Inc. (Assume that year-end balances approximate annual averages.)

(1) Return on assets.

(2) Return on common stock equity.

(3) Debt to assets ratio.

(b) Briefly discuss the operating performance and financial position of Ragatz. Industry averages for these ratios in 2017 were ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis, would you make an investment in the company鈥檚 5% convertible bonds? Explain.

(c) Assume you want to compare Ragatz to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value of the equity component of Ragatz鈥檚 convertible bonds is \)150,000, how would you adjust the analysis above to make valid comparisons between Ragatz and Merck?

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued \(2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was \)54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.鈥檚 \(100 par value common stock for each \)1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following

dates. (Round to the nearest dollar.)

(a) August 1, 2018. (Assume the book value method is used.)

(b) August 31, 2018.

(c) December 31, 2018, including closing entries for end-of-year.

(EPS: Simple Capital Structure) On January 1, 2017, Lennon Industries had stock outstanding as follows.

6% Cumulative preferred stock, \(100 par value,

issued and outstanding 10,000 shares \)1,000,000

Common stock, \(10 par value, issued and

outstanding 200,000 shares 2,000,000

To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 160,000 common shares. The acquisitions took place as shown below.

Date of Acquisition Shares Issued

Company A April 1, 2017 50,000

Company B July 1, 2017 80,000

Company C October 1, 2017 30,000

On May 14, 2017, Lennon realized a \)90,000 (before taxes) gain on discontinued operations.On December 31, 2017, Lennon recorded income of $300,000 from continuing operations.

Instructions

Assuming a 50% tax rate, compute the earnings per share data that should appear on the financial statements of Lennon Industries as of December 31, 2017.

Kalin Corporation had 2017 net income of \(1,000,000. During 2017, Kalin paid a dividend of \)2 per share on 100,000 shares of preferred stock. During 2017, Kalin had outstanding 250,000 shares of common stock.Compute Kalin鈥檚 2017 earnings per share.
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