91Ó°ÊÓ

GROUPWORK (Entries for Various Dilutive Securities) The stockholders’ 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—common 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’ 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.

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
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’s 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’s Equity		$4,854,,000

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