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Chapter 16: Q1P (page 881)

GROUPWORK (Entries for Various Dilutive Securities) The stockholders鈥� equity section of Martino Inc. at the beginning of the current year appears below.

Common stock, \(10 par value, authorized 1,000,000

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of par鈥攃ommon stock 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 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 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.

(b) Prepare the stockholders鈥� 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.

Short Answer

Expert verified

The total shareholder鈥檚 equity is $4,854,000.

Step by step solution

01

Definition of compensation expense

The compensation expense is those expenses that are related to the compensation.

02

Journal entries

Date

Particulars

Debit

Credit

  1. Memorandum entry made to indicate the number of rights issued including full details as to characteristics.




2.

Cash

$208,000

Bonds Payable

$192,000

Premium on Bonds Payable

$8,000

Contributed Surplus- Stock Warrants

$8,000

(Being entry for the issue)

3

Cash

$304,000

Common Share

$304,000

(Being entry for the issue of right shares

4

Contribute Surplus- Stock Warrants

$6,400

Cash

$48,000

Common Shares

$54,400

(Being entry for the warrant exercised)

5

Compensation Expense

$100,000

(Being entry for the compensation expense

$100,000

(Being entry for the compensation expense)

6

Cash

$120,000

Contributed Surplus- Stock Options

$40,000

Common Shares

$160,000

(Entry for options exercised)

6

Contributed Surplus- Stock Options

$10,000

Compensation Expense

$10,000

(Entry for the compensation expense)

03

Balance Sheet

Shareholder鈥檚 Equity

Share Capital

Common Share Authorized

1,000,000 shares, 314,000 shares

Issued and outstanding

$4,102,400

Contributed Surplus- Stock Warrants

$1,600

$4,104,000

Retained Earnings

$750,000

Total Shareholder鈥檚 Equity

$4,854,,000

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Most popular questions from this chapter

What is meant by a dilutive security?

Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary shares (par value \(1 per share) at a 20% discount. The purchase price must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on average 80 shares at \)22 per share (market price \(27.50). Under IFRS, Anazazi Co. will record:

(a) no compensation since the plan is used to raise capital, not compensate employees.

(b) compensation expense of \)5,500,000.

(c) compensation expense of \(18,700,000.

(d) compensation expense of \)3,740,000.

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.

(Basic EPS: Two-Year Presentation) Melton Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2017, and May 31, 2018. The income from operations for thefiscal year ended May 31, 2017, was \(1,800,000 and income from continuing operations for the fiscal year ended May 31, 2018, was \)2,500,000. In both years, the company incurred a 10% interest expense on \(2,400,000 of debt, an obligation that requires interestonly payments for 5 years. The company experienced a loss from discontinued operations of \)600,000 on February 2018. The company uses a 40% effective tax rate for income taxes.

The capital structure of Melton Corporation on June 1, 2016, consisted of 1 million shares of common stock outstanding and 20,000 shares of \(50 par value, 6%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants.

On October 1, 2016, Melton sold an additional 500,000 shares of the common stock at \)20 per share. Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2017. On December 1, 2017, Melton was able to sell an additional 800,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years.

Instructions

(a) Identify whether the capital structure at Melton Corporation is a simple or complex capital structure and explain why.

(b) Determine the weighted-average number of shares that Melton Corporation would use in calculating earnings per share for the fiscal year ended: (1) May 31, 2017. (2) May 31, 2018.

(c) Prepare, in good form, a comparative income statement, beginning with income from operations, for Melton Corportion for the fiscal years ended May 31, 2017, and May 31, 2018. This statement will be included in Melton鈥檚 annual report and should display the appropriate earnings per share presentations.

Question: . Mae Jong Corp. issues \(1,000,000 of 10% bonds payable which may be converted into 10,000 shares of \)2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will:

(a) first assign a value to the equity component, then determine the liability component.

(b) assign no value to the equity component since the conversion privilege is not separable from the bond.

(c) first assign a value to the liability component based on the face amount of the bond.

(d) use the 鈥渨ith-and-without鈥� method to value the compound instrument.
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