Chapter 15, Problem 2P

1.

To determine

Prepare a journal entry to record the issuance of common stock warrants on March 2, 2016.

Explanation of Solution

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, 2016:

Memorandum entry: On March 2, 2016, the company issued 200,000 stock warrants to the existing shareholders. The right allows each shareholder to exercise 4 stock warrants to acquire one share of company’s common stock at an exercise price of $23 per share before the rights expire on April 6, 2016.

2 (a)

To determine

Prepare the journal entry to record the sale of preferred stock with detachable warrants on March 5, 2016.

Explanation of Solution

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Prepare the journal entry to record the sale of preferred stock with detachable warrants on March 5, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
March 05	Cash $\left(\$83\times 10,000\right)$		830,000
	Preferred Stock			500,000
	Additional Paid-in Capital on Preferred     Stock			270,714
	Paid-in Capital–Stock Warrants			59,286
	(To record issuance of preferred stock with detachable warrants)

Table (1)

To record issuance of preferred stock with detachable warrants:

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $830,000.
• Preferred Stock is a stockholders’ equity account and the amount has increased due to issuance of preferred stock. Therefore, credit Preferred Stock account with $500,000.
• Additional Paid-in Capital on Preferred Stock is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Additional Paid-in Capital on Preferred Stock account with $270,714.
• Paid-in Capital–Common Stock Warrants is a stockholders’ equity account and the contributed capital has increased due to issue of warrants of common shares to preferred shareholders. Therefore, credit Paid-in Capital–Common Stock Warrants account with $59,286.

Working note: Compute the allocation of cash received:

Particulars	Calculations	Amount ($)
Preferred stock	$\frac{\left(\$78\times 10,000\text{shares}\right)}{\left[\left(\$78\times 10,000\text{shares}\right)+\left(\$6\times 10,000\text{shares}\right)\right]}\times \$830,000$	$770,714
Common warrants	$\frac{\left(\$6\times 10,000\text{shares}\right)}{\left[\left(\$78\times 10,000\text{shares}\right)+\left(\$6\times 10,000\text{shares}\right)\right]}\times \$830,000$	$59,286
		$830,000

Table (2)

2 (b)

To determine

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

Explanation of Solution

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

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
March 19	Cash $\left(\$18\times 6,000\right)$		$108,000
	Paid-in Capital–Stock Warrants $\left(\frac{\$59,286}{10,000}\times 6,000\right)$		$35,580
	Common Stock			$60,000
	Additional Paid-in Capital on common stock			$83,580
	(To record issuance of common stock when detachable warrants are exercised)

Table (3)

To record issuance of common stock when detachable warrants are exercised:

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $108,000.
• Paid-in Capital–Common Stock Warrants is a stockholders’ equity account and the contributed capital has decreased due to exercise of warrants of common shares to preferred shareholders. Therefore, debit Paid-in Capital–Common Stock Warrants account with $35,580.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $60,000.
• Additional Paid-in Capital on Common Stock is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Additional Paid-in Capital on Common Stock account with $83,580.

2 (c)

To determine

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

Explanation of Solution

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

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
April 02	Cash $\left(\$23\times \left[120,000/4\right]\right)$		$690,000
	Common Stock			$300,000
	Additional Paid-in Capital on common stock			$390,000
	(To record issuance of common stock when stock warrants are exercised)

Table (4)

To record issuance of common stock when stock warrants are exercised:

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $690,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $300,000.
• Additional Paid-in Capital on Common Stock is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Additional Paid-in Capital on Common Stock account with $390,000.

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, 2016.

Explanation of Solution

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
April 02	Paid-in Capital–Stock Warrant $\left(\$59,286-\$35,580\right)$		$23,706
	Additional Paid-in Capital from expired warrants			$23,706
	(To record expiry of detachable warrants)

Table (5)

To record expiry of detachable warrants:

• Paid-in Capital–Common Stock Warrants is a stockholders’ equity account and the contributed capital has decreased due to expired detachable warrants. Therefore, debit Paid-in Capital–Common Stock Warrants account with $23,706.
• Additional Paid-in Capital from Expired Warrants is a stockholders’ equity account and the contributed capital has increased due to expired warrants. Therefore, credit Additional Paid-in Capital from Expired Warrants account with $23,706.

Prepare memorandum entry to disclose the expiry of stock warrants on April 6, 2016 in the books of Corporation NE.

Memorandum entry: On April 6, 2016, 80,000 stock warrants out of 200,000 stock warrants issued to existing shareholders (pre-emptive rights) on March 2, 2016, expire.