Question

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 …………………………………………………………      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 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 out-standing 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 and 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 for the balance sheet at the end of the current year. Assume that the retained earnings balance at the end of the current year is $750,000.

Answer 1

(a)	Sl No.	Account titles and explanations			Debit	Credit
	1	Memorandum entry required
	2	Cash		(2000*104)	208000
		Discount on bonds payable			8000
		Bonds payable				200000
		Paid-in-capital-Stock warrants				16000
		(Note:1)
		(Issue of bonds with warrants)
	3	Cash	[(100000-5000)/10]*32		304000
		Common stock		(9500*10)		95000
		Paid-in-capital in excess of par				209000
		(Right issue exercised)
	4	Paid-in-capital-Stock warrants (16000*80%)			12800
		Cash	[(200000*0.8)/100]*30		48000
		Common stock		[(200000*0.8)/100]*10		16000
		Paid-in-capital in excess of par				44800
		(Warrants exercised)
	5	Compensation expense (10000*10)			100000
		Paid-in-capital-Stock options				100000
		(Stock option granted)
	6	Cash	(9000*30)		270000
		Paid-in-capital-Stock options (100000*0.9)			90000
		Common stock		(9000*10)		90000
		Paid-in-capital in excess of par				270000
		(stock options exercised)
		Paid-in-capital-Stock options			10000
		Compensation expense				10000
		(stock options lapsed)
	Notes:
	1. Allocation to bonds=208000*96/(96+8)=192000
	Discount on issue=200000-192000=8000
	Allocation to warrants=208000*8/(96+8)=16000
(b)	Stockholder's equity:
	Common stock,$10 par value,authorised 1000000 shares,
	320100 shares issued and outstanding				3201000
	Paid-in-capital in excess of par				1123800
	Paid-in-capital stock warrents				3200
	Retained earnings				750000
	Total stockholder's equity				5078000
	Computation:
					Common Stock	Paid-in- Capital in excess of par
	Beginning balances				3000000	600000
	Entry 3.				95000	209000
	Entry 4.				16000	44800
	Entry 6.				90000	270000
					3201000	1123800