Question

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

Common stock, $10 par value, authorized 953,000 shares, 284,000 shares issued and outstanding            $2,840,000
Paid-in capital in excess of par—common stock                                                                                         644,000
Retained earnings                                                578,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 99,000 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 $198,000, 10% bond issue at 103. 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 $7.

3. All but 4,950 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 9,700 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 970 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.

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 $743,000.

Answer 1

a	General Journal entries for the current year to record the transactions
1	Momorandum entry made to indicate the number of rights issued
2	Cash	$203,940
	Discount on Bonds Payable	$7,920
	Bonds Payable		$198,000
	Paid in Capital-stock warrant		$13,860
	Allocated to bonds
	($96/($96+$7))*$203940 = $190080
	Discount = $198000-190080 = $7920
	Allocated to warrants
	($7/($96+$7))*203940 = $13860
3	Cash	300960
	Common stock (9405 x 10)		$94,050
	Paid in capital in excess of par-common stock		$206,910
	Cash
	(99000-4950)right exercised/(10rights/per share)x$32 = $300960
4	Cash	$47,520
	Paid in capital-stock warrant	$11,088
	Common Stock		$15,840
	Paid in capital-common stock		$42,768
5	Compensation expenses	$97,000
	Paid in capital-stock option		$97,000
	$10 x 9700 options = $97000
6	For options excercised:
	Cash	$261,900
	Paid in capital-stock option	$87,300
	Common stock		$87,300
	Paid in capital-common stock		$261,900
	For option lapsed:
	Paid in capital-stock option	$9,700
	Compensation expense		$9,700
2	Stockholders' Equity section
	Common stock, $10 par value, authorized
	953,000 shares, 303,719 outstanding	$3,037,190
	Paid in capital in excess of par-common stock	$1,155,578
	Paid in capital-stock warrant	$2,772	$4,195,540
	Retained earnings		$743,000
	Total stockholders' equity		$4,938,540