On July 1, 2018, Crane Company issued for $9450000 a total of 90000 shares of $100 par value, 8% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Crane $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $9216000. The market price of the rights on July 1, 2018, was $2.40 per right. On October 31, 2018, when the market price of the common stock was $18 per share and the market value of the rights was $3.10 per right, 36000 rights were exercised.

1. As a result of the exercise of the 36000 rights and the issuance of the related common stock, what journal entry would Crane make?

Question

Kaiden Farley

Business

24 May, 01:40

On July 1, 2018, Crane Company issued for $9450000 a total of 90000 shares of $100 par value, 8% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Crane $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $9216000. The market price of the rights on July 1, 2018, was $2.40 per right. On October 31, 2018, when the market price of the common stock was $18 per share and the market value of the rights was $3.10 per right, 36000 rights were exercised.

1. As a result of the exercise of the 36000 rights and the issuance of the related common stock, what journal entry would Crane make?

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Answers (1)

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Moyer · Answer 1

Cash 540,000

Paid-in Capital-Stock Warrants $86,400

Common Stock $360,000

Paid-in Capital in Excess of Par-Common Stock 273,600

Explanation:

The Key to this Question is:

Although the right to purchase the common stock was exercised October 31, 2018. Since the warrant has already been issued July 1, 2018, the 36,000 rights exercised will be calculated and valuated based on prevailing prices on July 1, 2018.

Hence, the Par Value = $10, the purchase price allowed by warrant = $15 and the Market price of the rights to use $2.40

Step 1: Calculate the Cash Amount Received from the exercise of the 36,000 rights

= 36,000 Shares (exercised on October 31, 2018) x $15 (the Warrant right to purchase common Stock)

= 36,000 x $15

=$540,000 (this is the amount paid for the 36,000 rights exercised)

Step 2: Calculate the Paid in Capital

a. Paid in Capital - Stock Warrants - based on the Market Price of Rights on July 1, 2018

= 36,000 x $2.40 (Market Price of the rights on July 1, 2018)

= $86,400 (This is the value of the 36,000 shares purchased based on the prevailing market price @ July 1, 2018)

b. Calculate Paid in Capital based on the Issued warrant's Par value of One Share of Common Stock when the warrant was issued

= 36, 000 x $10

= $360,000

c. Calculate the Paid-in Capital in Excess of Par-Common Stock

= $360,000 - $86,000

=$273,600 (This is the difference between the par value on July 1, 2018 when the rights were issued and the market price of the rights on that same date).

In summary:

Cash 540,000

Paid-in Capital-Stock Warrants $86,400

Common Stock $360,000

Paid-in Capital in Excess of Par-Common Stock 273,600