16-5

Question 1

1. _The company issued 100,000 rights to the shareholder_s. Ten rights are needed to buy one share at S32 and the rights are void after 3 0 days. The shares’ market price at this time was $34 per share.

Answer 1

• just a memo entry

Indicate the # of rights issued including full details as to characteristics

Question 2

2. The company sold to 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.

How are the Warrants calculated and what is the journal entry:

Answer 2

• that means that the warrants are calculated as the difference between the price that was paid for the Bond and what would have been paid for the bond without the warrant
  dr. CASH - the full amount

Don’t forget to cr. Contributed Surplus - Stock Warrants

Question 3

3. All but 10,000 of the rights issued in item 1 were exercised in 30 days.

Answer 3

1 Calculate how many rights were exercised and how many rights/share

dr. Cash
cr. Common Shares

Question 4

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.

Answer 4

1. Calculate the amount that goes into the CASH account:
   dr. Cash for the whole amount: #warrants exercised x shares x price of the share
2. dr. Contributed Surplus - STOCK WARRANTS (for the percentage that was exercised)
3. cr. Common Shares for the plug amount.

Question 5

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.

Answer 5

This is an expense to the company as the right to exercise the stock options was earned by the executive during the service period:

dr. Compensation expense
cr. Contributed Surplus - Stock Options

Question 6

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

Answer 6

1. Calculate how many options were exercised and dr. Cash for that amount
   dr. Contributed Surplus - Stock Options (for the amount that was exercised)
   cr. Common Shares - plug number

Question 7

For options lapsed/expire there are two options:

1. when an ee fails to fulfill an obligation, such as remaining the ee of the company
2. when the options expire (they were not exercised) or the share price is lower that the exercise price

Answer 7

1. dr. Contributed Surplus - Stock Options

cr Compensation expense

2. dr Contributed Surplus - Stock Options

cr. Contributed Surplus - Expired Stock options

Question 8

Where does the Contributed Surplus account belong?

Answer 8

Under Shareholder Equity

Share Capital:

…..

(before) Retained Earnings

Question 9

When the ask for the B/S

Answer 9

• recalculate the # of shares and the amount in the C/S account
• don’t forget the Contributed Surplus (Warrants, Stock Options etc) that have a credit balance
• Retained Earnings