Module 5 Flashcards
In 2019, Chartres Inc., issued for $105 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Chartre’s $25 par value common stock at the option of the preferred stockholder. In April 2020, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share.
What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock?
$1,800,000
Correct. In accounting for the exercise of convertible preferred stock, a company uses the book value method and fair values are ignored. The journal entry for the conversion includes: Debit Convertible Preferred Stock (at par), Debit Paid-in Capital in Excess of Par - Preferred Stock, Debit Common Stock (at par). Additionally, if the Preferred Stock entries exceed the Common Stock, an additional credit is made to the Paid-in Capital in Excess of Par - Common Stock account. On the other hand, if the Common Stock credits exceeds the Preferred Stock entries, an additional debit is recorded in the Retained Earnings account to balance the entry. In this case, the journal entry includes the following: Debit Convertible Preferred Stock: $6,000,000 (60,000 shares x $100/share par value) Debit Paid-in Capital in Excess of Par - Preferred Stock: $300,000 [60,000 x (105/share - 100/share)] Credit Common Stock: $4,500,000 (60,000 preferred shares converted to 3 shares of common stock = $180,000 common shares x $25/share par value) Credit Paid-in Capital in Excess of Par - Common Stock: $1,800,000 [($6,000,000 + $300,000) - $4,500,000]
Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1.
What is Milo’s weighted average shares outstanding for the year?
872,000
Correct. To calculate the weighted-average number of shares outstanding, companies must weight the shares by the fraction of the period they are outstanding. Milo’s weighted-average of number of shares outstanding is calculated as: (a) 800,000 shares x 4/12 of the year = 266,667 shares (b) 820,000 shares + 126,000 issued shares = 926,000 shares x 4/12 of the year = 308,667 shares (c) 926,000 shares - 63,000 shares purchased as treasury stock = 863,000 shares x 2/12 of the year = 143,833 shares (d) 863,000 shares + 54,000 shares issued = 152,833 shares x 2/12 of the year = 152,833 266,667 shares + 308,667 shares + 143,833 shares + 152,833 shares = 872,000 shares
On March 1, 2021, Ruiz Corporation issued $2,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2041. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2021, the fair value of Ruiz’s common stock was $40 per share and the fair value of the warrants was $2.00.
What amount should Ruiz record on March 1, 2021 as paid-in capital from stock warrants?
$104,000
Correct. When bonds are issued with detachable warrants, two securities are created. The value of each security is allocated between the two using the proportional method which uses the fair value of both securities, if available, to make the allocation of proceeds. The calculation of the amount allocated to the Paid-in Capital - Stock Warrants is calculated below: Proceeds = $2,000,000 x 104% = $2,080,000 Fair value of bonds = $2,000,000 x 95% = $1,900,000 Number of warrants issued = $2,000,000 / $1,000 per bond = 2,000 bonds x 25 warrants per bond = 50,000 warrants Fair value of warrants = 50,000 warrants x $2 per warrrant = $100,000 Amount of proceeds allocated to warrants = [$100,000 / ($1,900,000 + $100,000)] x $2,080,000 = $104,000
On June 30, 2021, Yang Corporation granted compensatory stock options for 25,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $100,000. The options are exercisable beginning January 1, 2023, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2024. On January 4, 2023, when the market price of the stock was $36 per share, all options for the 25,000 shares were exercised. The service period is for two years beginning January 1, 2021.
Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2021?
$50,000
Correct. A company recognizes compensation expense in the periods in which its employees perform the service—the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Thus, the company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees’ services. In this case, the compensation expense of $100,000 is divided by the service period of 2 years. The compensation expense for 2021 is $50,000.
