The shareholders' equity section of Finley Inc. at the beginning of the current year is as follows:
Common shares, 1,000,000 shares authorized, 300,000 shares issued and outstanding ......... $3,600,000
Retained earnings ............................................................................................. 570,000
During the current year, the following transactions occurred.
1. The company issued 100,000 rights to the shareholders. Ten rights are needed to buy one share at $32 and the rights are void after 30 days. The shares' market price at this time was $34 per share.
2. The company sold to the public a $200,000, 10% bond issue at par. The company also issued with each $100 bond one detachable stock purchase warrant, which provided for the purchase of common shares at $30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8.
3. All but 10,000 of the rights issued in item 1 were exercised in 30 days.
4. At the end of the year, 80% of the warrants in item 2 had been exercised, and the remaining were outstanding and in good standing.
5. During the current year, the company granted stock options for 5,000 common shares to company executives. The company, using an options pricing model, determined that each option is worth $10. The exercise or strike price is $30. The options were to expire at year end and were considered compensation for the current year.
6. All but 1,000 shares related to the stock option plan were exercised by year end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.
Instructions
(a) Prepare general journal entries for the current year to record each of the transactions. Assume the company follows IFRS.
(b) Prepare the shareholders' equity section of the statement of financial position at the end of the current year. Assume that retained earnings at the end of the current year is $750,000.
(c) Assume instead that the executive in items 5 and 6 had fulfilled the employment contract, and that the stock options expired because the share price was lower than the exercise or strike price. Would it be incorrect to have recorded compensation expense related to the expired stock options, during the service period? Why or why not? Would the journal entry to record the expiration be any different than the journal entry for item 6 recorded in part (a)? If so, prepare the journal entry.