Question

The shareholders' equity section of Finley Inc. at the beginning of the current year is as follows:

Common shares, 1,000,000 shares authorized, 300,000 shares issued and outstanding$3,600,000Retained earnings570,000During the current year, the following transactions occurred.

1. The company issued 100,000 rights to the shareholders. Ten rights are needed to buy one share at $32 and the rights are void after 30 days. The shares' market price at this time was $34 per share.

2. The company sold 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.

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

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.

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.

6. All but 1,000 shares related to the stock option plan whew exercised by year-end. The aspiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

A- Prepare general journal entries for the current year to record each of the transactions. Company follows IFRS

B- Prepare the shareholders equity section of the statement of financial position at the end of the current year. Retained earnings for the current year is 750,000

C- Assume instead that the executives in items 5 and 6 had fulfilled the employment contract, and that the stock options expired because the share price was lower than the exercise or strike price. Would it be incorrect to have recorded compensation expense related to the expired stock options, during the service period? Why or why not? Would the journal entry to record the expiration be any different than the journal entry for item 6 recorded in part A ? if so, prepare the journal entry.

Answer 1

A

Trn.	General Journal	Debit	Credit
1	No entry
2	Cash (2000 × $100)	$200,000
	Discount on bond payable	$16,000
	Bonds payable		$200,000
	Paid-in capital stock warrants (2,000 × $8)		$16,000
3	Cash [(100,000-10,000)/10] × $32	$288,000
	Common stock (9000 × $12)		$108,000
	Paid-in capital in excess of par-stock		$180,000
4	Paid-in capital stock warrants ($16,000 × 80%)	$12,800
	Cash (2000 × 80% × $30)	$48,000
	Common stock (2000 × 80% × $12)		$19,200
	Paid-in capital in excess of par-stock		$41,600
5	Compensation expense (5,000 × $10)	$50,000
	Paid-in capital stock options		$50,000
6	Cash (9,000 × $30)	$270,000
	Paid-in capital stock options (100000 × 0.9)	$90,000
	Common stock (9000 × $12)		$108,000
	Paid-in capital in excess of par-stock		$252,000
	Paid-in capital stock options	$5,000
	Compensation expense		$5,000

Note: Common stock par at ($3,600,000/300,000 shares) = $12 per share.

_____________________________________________________________________

B

Working as follows:

	Common stock	Paid-in capital in excess of par
Beginning balance	$3,600,000	$0
Trn. 3	$108,000	$180,000
Trn. 4	$192,000	$41,600
Trn. 6	$108,000	$252,000
	$4,008,000	$473,600

Stockholders' Equity
Common stock, $12 par value, Authorized 1000000 shares
3334,000 shares issued and outstanding	$4,008,000
Paid-in capital in excess of par-stock	$473,600
Paid-in capital stock warrants ($16,000 -$12800)	$3,200
Retained Earnings	$570,000
Total	$5,054,800