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Equity Financing - Exercise

This document discusses equity financing transactions for Webster Inc. during 2016. It provides the stockholders' equity balances as of December 31, 2015 and details transactions that occurred in 2016, including key executives exercising stock options, the company issuing bonds with detachable warrants, the warrants being exercised, and unexercised stock options expiring. The assistant provides journal entries to record the 2016 transactions and prepares the stockholders' equity section of the balance sheet as of December 31, 2016, showing increases in ordinary share capital and retained profits.

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379 views2 pages

Equity Financing - Exercise

This document discusses equity financing transactions for Webster Inc. during 2016. It provides the stockholders' equity balances as of December 31, 2015 and details transactions that occurred in 2016, including key executives exercising stock options, the company issuing bonds with detachable warrants, the warrants being exercised, and unexercised stock options expiring. The assistant provides journal entries to record the 2016 transactions and prepares the stockholders' equity section of the balance sheet as of December 31, 2016, showing increases in ordinary share capital and retained profits.

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lovingbooks1
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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

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