Question

Problem #1: The stockholders’ equity section of Whaler Inc. at the beginning of the current year appears below.

Common stock, $1 par value, authorized 5,000,000
shares, 800,000 shares issued and outstanding	$     800,000
Paid-in capital in excess of par—common stock	16,100,000
Retained earnings	260,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 500,000 rights. Ten rights are needed to buy one share of stock at $21. The rights were void after 30 days. The market price of the stock at this time was $22 per share.
2. The company sold to the public a $1,000,000, 6% bond issue at 106. The company also issued with each $1,000 bond a detachable stock purchase warrant, which provided for the purchase of common stock at $20 per share. Shortly after issuance, similar bonds without warrants were selling at 97 and the warrants at $10.
3. All but 75,000 of the rights issued in (1) were exercised in 30 days.
4. At the end of the year, 60% of the warrants in (2) had been exercised.
5. During the current year, the company granted stock options for 100,000 shares of common stock to company executives. The company, using a fair value option-pricing model, determines that each option is worth $2.60. The option price is $25. The options were to expire at year-end and were considered compensation for the current year.
6. 20,000 shares related to the stock-option plan were exercised.

Instructions

Prepare general journal entries for the current year to record the transactions listed above.

Answer 1

Notes- Since the option price is more than options fair value, hence there is no compensation cost to be accounted by the Company. Please find below step wise journal entries-

Description	Debit	Credit	Working
Cash/ Bank A/c-- Dr.	10,00,000
To 6% Bond A/c		9,06,542	97*1000000/(97+10)- based on relative fair value
To Additional Paid in Capital A/c		93,458	10*1000000/(97+10)- based on relative fair value
(Being 906 bond of face value $1,000 issued at $1060. Assumed face value is $1000 with detachable option)
Cash/ Bank A/c--- Dr.	8,92,500		(500,000-75000)/10*21
To Common stock, paid up		42,500	1* 42500
To Additional Paid in Capital A/c		8,50,000	20*42500
(Being 42,500 full paid shares of face value $1 each issued on rights basis)
Cash/ Bank A/c--- Dr.	10,872		906*60%*20
To Common stock, paid up		543.6	906*60%
To Additional Paid in Capital A/c		10,328
(Being full paid shares of face value $1 each issued on against exercise of 60% warrant)
Cash/ Bank A/c--- Dr.	5,00,000		20,000*25 (option price)
To Common stock, paid up		25,000
To Additional Paid in Capital A/c		4,75,000
(Being 20,000 full paid shares of face value $1 each issued on against exercise of stock options)