Stock Rights, Retained Earnings

Question 1

How is equity tested?

Answer 1

Balances in equity accounts
How are the accounts impacted?
How are they reported?
What is the impact on total OE?

Tool: Journal entries/T-Accounts

Question 2

What is a stock right?

Answer 2

Stock right is an option to purchase a certain number of shares, at a specified price, during a specified time period.

Question 3

What entry is made when you issue right to shareholders?

Answer 3

No entry is made

Question 4

What is the entry when the shares are exercised?

Answer 4

Cash (Shares X Exercise Price)
Common Stock (Shares X Par)
APIC (#Shares X Exercise Price - Par)

Question 5

When stock rights are issued to outside parties instead of compensation, how do you record that entry?

Answer 5

Record Expense DB

Stock Rights Outstanding CR

Question 6

Example of Stock Right to outside party: Huskie Company pays a supplier with $10,00 cash plus 200 rights on 1/1/X1. Two rights entitle the holder to purchase one share of Huskie $1 par common stock for $40. The market value of the stock on the day the rights were issued is $55. The rights must be exercised by 12/31/X1.

Answer 6

Supply Expense DB $11,500 (10,000 + (55-40)(200/2)
Stock rights outstanding CR $1,500 (55-40)X200/2
Cash CR $10,000

Cash DB 4,000 ($40 X 200/2)
Stock Rights Outstanding DB $1500
CR: Common stock (Par) CR 100
CR: APIC- Common Stock CR 5,400