The stockholders\' equity section of Martino Inc. at the beginning of the curren
ID: 2424854 • Letter: T
Question
The stockholders' equity section of Martino Inc. at the beginning of the current year appears below. The company issued to the stockholders 151,000 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. The company sold to the public a $213,000, 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. All but 7,550 of the rights issued in (1) were exercised in 30 days. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing. During the current year, the company granted stock options for 11,700 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. All but 1,170 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.Explanation / Answer
1. Memorandum entry made to indicate the number of rights issued.
2. Cash ........................................................................... 213,000
Discount on Bonds Payable*......................................... 4040
Bonds Payable............................................................... 200,000
Paid-in Capital—Stock Warrants**........................... 17040
**Allocated to Bonds:
$96 / ($96 + $8) * $213000 = $195960
Discount = $200,000 – $195960 = $4040
**Allocated to Warrants:
$8 / ($96 + $8) * $213000 = $17040
3. Cash*.......................................................................... 459040
Common Stock (14345 * $10)...................................... 143450
Paid-in Capital in Excess of Par.................................. 315590
*[(151,000 – 7,550) rights exercised] / (10 rights/share)] * $32 = $459040
4. Paid-in CapitalStock Warrants($17040 X 80%)... ................... 13632
Cash*................................................................................... 51,120
Common Stock (1,704 * $10)...................................... 17,040
Paid-in Capital in Excess of Par.................................. 47,712
*0.80 X $213,000/$100 per bond = 1,704
*warrants exercised; 1,704 * $30 = $51,120
5. Compensation Expense*.................................................... 117,000
Paid-in Capital—Stock Options................................... 117,000
*$10 * 11,700 options = $117,000
6. For options exercised:
Cash (10,530 * $30)............................................................................................ 315,900
Paid-in Capital—Stock Options(90% * $117,000)....................................................105,300
Common Stock (10,530 * $10)...................................... 105,300
Paid-in Capital in Excess of Par.................................. 315,900
For options lapsed:
Paid-in Capital—Stock Options.................................. 11,700
Compensation Expense*.............................................. 11,700
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