Question

In: Accounting

The stockholders’ equity section of Martino Inc. at the beginning of the current year appears below.

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.

Solutions

Expert Solution

Step 1: Definition of compensation expense

The compensation expense is those expenses that are related to the compensation.
Step 2: Journal entries

Date    Particulars    Debit    Credit
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)       


Step 3: 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


The total shareholder’s equity is $4,854,000.

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