ACCT3103_Intermediate financial accounting II

Equity financing - Exercise

(Accounting for Various Capital Stock Transactions)

The stockholders equity section of Webster Inc. showed the following data on December 31,
2015:
Ordinary Share Capital - 300,000 shares authorized, 250,000 shares issued and
outstanding: $7,800,000;
Paid-in capital from Stock Options: $150,000;
Retained Profits: $480,000.

The stock options were granted to key executives and provided them the right to acquire 30,000
shares of ordinary share at $35 per share. The options had a value of $5 each on the grant date.

The following transactions occurred during 2016.

Mar 31 Key executives exercised 4,500 options outstanding at December 31,2015. The market
price per share was $44 at this time.
Apr 1 The company issued bonds of $2,000,000 at par, given each $1,000 bond a detachable
warrant enabling the holder to purchase two shares of ordinary share at $40 each for
1-year period. Market value immediately following issuance of the bond was $4 per
warrant and $998 per $1,000 bond without the warrant.
Sept 30 All warrants issued with the bonds on April 1 were exercised.
Nov 30 The market price per share dropped to $33, and options came due. Because the market
price was below the option price, no remaining options were exercised.

Instructions:
1. Provide entries to record these transactions.
2. Prepare the Stockholders Equity section of the balance sheet as of December 31, 2016
(assume net income of $210,000 and no dividend declarations for 2016).
ACCT3103_Intermediate financial accounting II

Solution:

1. Journal entries
Mar. 31
Cash (4,500 shares $35) 157,500
Paid-In Capital from Stock Options ($5 4,500 options) 22,500
Ordinary Share Capital (bal. fig) 180,000

Apr. 1
Cash 2,000,000
Discount on Bonds Payable 7,984
Bonds Payable 2,000,000
Ordinary Share Warrant 7,984*
*Value assigned to warrants: $2,000,000 x $4 / ($998+$4) = $7,984 (rounded)

Sept. 30
Cash (4,000 shares $40) 160,000
Ordinary Share Warrants 7,984
Ordinary Share Capital (bal.fig) 167,984

Nov. 30
Paid-In Capital from Stock Options 127,500
Ordinary Share Capital 127,500

2. Stockholders Equity
Share Capital:
Ordinary Share Capital- 300,000 shares authorized,
258,500 shares issued and outstanding $ 8,275,484
Total Share Capital $ 8,275,484
Retained Profits 690,000
Total Shareholders Equity $ 8,965,484