Question

Problem 16-01 The stockholders' equity section of Skysong Inc. at the beginning of the current year appears below. Common stock, $10 par value, authorized 1,066,000 shares, 306,000 shares issued and outstanding Paid-in capital in excess of par-common stock Retained earnings $3,060,000 552,000 626,000 During the current year, the following transactions occurred. 1. The company issued to the stockholders 97,000 rights. Ten rights are needed to buy one share of stock at $31. The rights were void after 30 days. The market price of the stock at this time was $33 per share. 2. The company sold to the public a $201,000, 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 $29 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8. 3. All but 4,850 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 9,500 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 $29. The options were to expire at year-end and were considered compensation for the current year. 6. All but 950 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.

Please show explanation and equations! Thank you!

Answer 1

Please find below table useful to compute desired results: -

Credit F Stockholder's equity: shares issued and outstanding 1=3060000+D9+D14+D22 Paid-in-capital in excess of par 1=552000+D10+D15+D23 Paid-in-capital stock warrents =D6-C12 Retained earnings =774000 Total stockholder's equity =SUM(G2:65) =201000 =209040*8/(96+8) 6 =97000-4850 =285665-92150 А 1 Si No Account titles and explanations Debit 2 1 Memorandum entry required 3 2 Cash =201000/100*104 Discount on bonds payable =201000-209040*96/(96+8)) Bonds payable Paid-in-capital-Stock warrants (Issue of bonds with warrants) Cash =((97000-4850/10)*31 Common stock Paid-in-capital in excess of par (Right issue exercised) Paid-in-capital-Stock warrants =16080*80% Cash =201000*80%/100*29 Common stock 15 Paid-in-capital in excess of par 16 (Warrants exercised) 17 5 Compensation expense =9500*10 18 Paid-in-capital-Stock options 19 (Stock option granted) Cash =(9500-950)*29 Paid-in-capital-Stock options =D22 Common stock Paid-in-capital in excess of par (stock options exercised) Paid-in-capital-Stock options =D26 Compensation expense (stock options lapsed) =201000*80%/100*10 =C12+C13-D14 =C17 =(9500-950)*10 =C20 =950*10

End results would be as follows: -

D Credit E b) 1 F Stockholder's equity: shares issued and outstanding | 3,253,730 Paid-in-capital in excess of par 1,036,881 Paid-in-capital stock warrents 3.216 Retained earnings 774.000 Total stockholder's equity 5,067,827 201,000 16,080 92.150 193,515 A B C Si No. Account titles and explanations Debit Memorandum entry required 2 Cash 209,040 Discount on bonds payable 8.040 Bonds payable Paid-in-capital-Stock warrants (Issue of bonds with warrants) 3 Cash 285,665 Common stock Paid-in-capital in excess of par (Right issue exercised) 4 Paid-in-capital-Stock warrants 12,864 Cash 46,632 Common stock Paid-in-capital in excess of par (Warrants exercised) 5 Compensation expense 95.000 Paid-in-capital-Stock options (Stock option granted) 6 Cash 247.950 Paid-in-capital-Stock options 85,500 Common stock Paid-in-capital in excess of par (stock options exercised) Paid-in-capital-Stock options 9.500 Compensation expense (stock options lapsed) 16.080 43,416 15 95.000 85,500 247.950 9.500