Asked by McKall Hulsey on Apr 24, 2024
Verified
Refer to Exhibit 14-8.After a total of 2, 000 warrants were exercised, the remaining warrants expired.The entry to record the expiration of the warrants would include a credit to Additional Paid-in Capital from Expired Warrants for
A) $26, 000
B) $39, 000
C) $42, 000
D) $65, 000
Expired Warrants
Warrants that have reached their expiration date and are no longer valid or exercisable to buy the underlying security at a predetermined price.
Additional Paid-In Capital
The amount of money paid by investors to a company above the par value of the shares during common or preferred stock issuance.
Common Stock Warrants
Common stock warrants are financial instruments that give the holder the right to purchase the issuer's common stock at a specified price before the warrant expires.
- Acquire knowledge on and utilize the accounting processes for managing stock warrants at the time of exercise or expiration in conjunction with the issuance of bonds.
Verified Answer
MA
MUHAMMAD AWAIS MUGHAL7 days ago
Final Answer :
B
Explanation :
Each $1,000 bond carries ten warrants, so a total of 20,000 warrants were issued (2,000 bonds x 10 warrants per bond). Since each warrant allows the holder to purchase one share of $10 par common stock for $50, the exercise price of each warrant is $500 ($50 x 10).
The total exercise proceeds from the warrants would be: 2,000 warrants x $500 exercise price = $1,000,000.
Since the bonds were issued at 104, or $1,040 per bond, the total proceeds from the bond issuance would be: $500,000 x 104% = $520,000.
Therefore, the total proceeds from the bond issuance and exercise of warrants would be $520,000 + $1,000,000 = $1,520,000.
The total par value of the common stock that could be issued upon exercise of all warrants would be: 20,000 warrants x 1 share per warrant x $10 par value per share = $2,000,000.
Since only 2,000 warrants were exercised, the total par value of the common stock issued would be: 2,000 warrants x 1 share per warrant x $10 par value per share = $20,000.
The total proceeds from the exercise of the warrants ($1,000,000) exceeds the total par value of the stock issued ($20,000), so a portion of the excess should be credited to Additional Paid-in Capital from Warrants Exercised. The remaining excess should be credited to Additional Paid-in Capital from Expired Warrants.
The excess proceeds from the exercise of the warrants are: $980,000 ($1,000,000 - $20,000).
Therefore, the entry to record the expiration of the warrants would include a credit to Additional Paid-in Capital from Expired Warrants for $39,200 ($980,000 x 4%). Therefore, the answer is B.
The total exercise proceeds from the warrants would be: 2,000 warrants x $500 exercise price = $1,000,000.
Since the bonds were issued at 104, or $1,040 per bond, the total proceeds from the bond issuance would be: $500,000 x 104% = $520,000.
Therefore, the total proceeds from the bond issuance and exercise of warrants would be $520,000 + $1,000,000 = $1,520,000.
The total par value of the common stock that could be issued upon exercise of all warrants would be: 20,000 warrants x 1 share per warrant x $10 par value per share = $2,000,000.
Since only 2,000 warrants were exercised, the total par value of the common stock issued would be: 2,000 warrants x 1 share per warrant x $10 par value per share = $20,000.
The total proceeds from the exercise of the warrants ($1,000,000) exceeds the total par value of the stock issued ($20,000), so a portion of the excess should be credited to Additional Paid-in Capital from Warrants Exercised. The remaining excess should be credited to Additional Paid-in Capital from Expired Warrants.
The excess proceeds from the exercise of the warrants are: $980,000 ($1,000,000 - $20,000).
Therefore, the entry to record the expiration of the warrants would include a credit to Additional Paid-in Capital from Expired Warrants for $39,200 ($980,000 x 4%). Therefore, the answer is B.
Learning Objectives
- Acquire knowledge on and utilize the accounting processes for managing stock warrants at the time of exercise or expiration in conjunction with the issuance of bonds.