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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.

Short Answer

Expert verified

The total shareholder’s 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’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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Most popular questions from this chapter

16-18 (L04) (EPS: Simple Capital Structure) Flagstad Inc. presented the following data.

Net income \(2,500,000

Preferred stock: 50,000 shares outstanding,

\)100 par, 8% cumulative, not convertible 5,000,000

Common stock: Shares outstanding 1/1 750,000

Issued for cash, 5/1 300,000

Acquired treasury stock for cash, 8/1 150,000

2-for-1 stock split, 10/1

Instructions

Compute earnings per share.

What are the arguments for giving separate accounting recognition to the conversion feature of debentures?

What are stock rights? How does the issuing company account for them?

(Conversion of Bonds) On January 1, 2016, when its \(30 par value common stock was selling for \)80 per share, Plato Corp. issued \(10,000,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each \)1,000 bond to convert the bond into five shares of the corporation’s common stock. The debentures were issued for \(10,800,000.The present value of the bond payments at the time of issuance was \)8,500,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, the corporation’s \(30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2018, when the corporation’s \)15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercisedtheir conversion options. The corporation uses the straight-line method for amortizing anybond discounts or premiums.

a) Prepare in general journal form the entry to record the original issuance of the convertible debentures.

(b) Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method.

Show supporting computations in good form.

What is meant by a dilutive security?

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