
1.
Prepare a
1.

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, 2019:
Memorandum entry: On March 2, 2019, 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, 2019.
2 (a)
Prepare the journal entry to record the sale of
2 (a)

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, 2019:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
March 05 | Cash | 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 | $770,714 | |
Common warrants | $59,286 | |
$830,000 |
Table (2)
2 (b)
Prepare a journal entry to record the exercise of stock warrants attached to preferred stock.
2 (b)

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 | $108,000 | ||
Paid-in Capital–Stock Warrants | $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)
Prepare a journal entry to record the exercise of stock warrants issues in conjunction with the pre-emptive right.
2 (c)

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 | $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)
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, 2019.
2 (d)

Explanation of Solution
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
April 02 | Paid-in Capital–Stock Warrant | $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, 2019, 80,000 stock warrants out of 200,000 stock warrants issued to existing shareholders (pre-emptive rights) on March 2, 2019, expire.
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