Question

Problem 16-1 (Part Level Submission) The stockholders' equity section of Blossom Inc. at the beginning of the current year appears below. Common stock, $10 par value, authorized 1,038,000 shares, 327,000 shares issued and outstanding Paid-in capital in excess of par-common stock Retained earnings $3,270,000 657,000 624,000 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 $33. The rights were void after 30 days. The market price of the stock at this time was $35 per share. 2. The company sold to the public a $197,000, 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 $31 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 9,800 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 $31. The options were to expire at year-end and were considered compensation for the current year. 6. All but 980 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. (a) Prepare general journal entries for the current year to record the transactions listed above. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round intermediate calculations to 5 decimal places, e.g. 1.24687 and final answers to O decimal places, e.g. 5,125.)

Answer 1

1. Memorandum entry made to indicate the number of rights issued. So no entry required.

2.

Account titles and explanation	Debit	credit
Cash (197000*1.04)	204,880
Discount on bonds payable	7,880
Bonds payable		197000
Paid in capital – stock warrants		15,760

Allocated to bonds :

(96/(96+8))*(197000*1.04) = 189,120

Discount = 197000 - 189,120= 7,880

Allocated to warrants:

(8/(96+8))*(197000*1.04) = 15,760

3.

Account titles and explanation	Debit	credit
Cash	313,500
Common stock (9500*10)		95000
Paid-in Capital in Excess of Par		218,500

Rights exercised =100,000 – 5,000=95000

Right shared to be issued = 95000/10 rights per share = 9500

Value of Right shared issued = 9500 x 33 = $313,500

4.

Account titles and explanation	Debit	credit
Paid-in Capital—Stock Warrants (15760*80%)	12,608
Cash (1576*31)	48,856
Common Stock (1,576 X $10)		15760
Paid-in Capital in Excess of Par		45,704

Total warrants issued =$197000/$100 per bond = 1970

Warrants exercised = 1970x80%=1,576

5.

Account titles and explanation	Debit	credit
Compensation Expense	98000
Paid-in Capital—Stock Options		98000

$10 X 9800 options = $98000

6.

Account titles and explanation	Debit	credit
For options exercised:
Cash (9800-980)*31	273,420
Paid-in Capital—Stock Options	88200
Common stock (9800-980)*10		88200
Paid-in Capital in Excess of Par		273,420
For options lapsed:
Paid-in Capital—Stock Options	9800
Compensation Expense (980*10)		9800

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