The stockholders’ equity section of Cullumber Inc. at the beginning of the curre

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.

Explanation / Answer

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

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