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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Stock Rights to Shareholders Nichols Electronics Corporation has been experiencing a steadily growing demand for its products. In order to meet this demand, a major expansion of production facilities is necessary. Nichols plans to raise the money for this proposed expansion by issuing 10,000 shares of $50 par preferred stock and 50,000 shares of $10 par common stock. These shares were previously authorized but have not yet been issued.

There are presently 200,000 shares of $10 par common stock issued and outstanding. To maintain the preemptive right of the current shareholders, the board of directors authorizes the issuance of stock rights to the current common shareholders on March 2, 2019. The current market price of the common stock at this date is $24 per share. Each common shareholder is to receive one stock warrant for each share of common stock owned. One additional share of common stock may be purchased at any time prior to April 7, 2019, for $23 and 4 of the stock warrants.

There are presently 20,000 shares of the $50 par preferred stock issued and outstanding. They were selling for $78 per sharse on March 4, 2019. No preemptive right applies to the preferred stock. In order to assure the sale of the additional 10,000 shares of the preferred stock, the board of directors also authorizes one stock warrant to be attached to each share of preferred stock in the new issue. One of these stock warrants allows the preferred shareholder to purchase one share of $10 par common stock for $18 per share at any time prior to April 7, 2019. The preferred shares with warrants attached are issued on March 5, 2019, at a price of $83 per share. The warrants begin trading in the market at $6 each.

Required:

  1. 1. Prepare the entry to record the issuance of the common stock warrants on March 2, 2019.
  2. 2. Prepare journal entries to record the following transactions:
  3. a. The sale of the 10,000 shares of $50 par preferred stock with detachable warrants on March 5, 2019.
  4. b. The exercise on March 19. 2019, of 6,000 of the stock warrants that had been attached to the preferred stock (the common stock price is currently $24 per share and the preferred stock is selling ex rights for $79 per share).
  5. c. The exercise on April 2, 2019, of 120,000 stock warrants issued in conjunction with the preemptive right (the common stock is currently selling at $23.50 per share).
  6. d. The 4,000 stock warrants related to the preferred stock and the 80,000 stock warrants related to the preemptive right expire on April 6, 2019.

1.

To determine

Prepare a journal entry to record the issuance of common stock warrants on March 2, 2019.

Explanation

Stock Warrants: Stock warrants are the rights issued to the shareholders of a company to buy additional or unissued shares at a pre-determined exercise price during certain period of time.

Prepare an entry to record the issuance of common stock warrants on March 2, 2019:

2 (a)

To determine

Prepare the journal entry to record the sale of preferred stock with detachable warrants on March 5, 2019.

2 (b)

To determine

Prepare a journal entry to record the exercise of stock warrants attached to preferred stock.

2 (c)

To determine

Prepare a journal entry to record the exercise of stock warrants issues in conjunction with the pre-emptive right.

2 (d)

To determine

Prepare the journal entry to record the 4,000 stock warrants related to the preferred stock and the 80,000 stock warrants related to the pre-emptive right expire on April 6, 2019.

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