The Nichols Electronics Corporation has been experiencing a steadily growing demand for its products. In order to meet this demand,


The Nichols Electronics Corporation has been experiencing a steadily growing demand for its products. In order to meet this demand, a major expansion of production facilities is necessary. The company plans to raise the money for this proposed expansion by issuing 10,000 shares of $50 par preferred stock and 50,000 shares of $10 par common stock. These shares were previously authorized but have not yet been issued.

There are presently 200,000 shares of $10 par common stock issued and outstanding. In order that the preemptive right of the current stockholders be maintained, the board of directors authorizes the issuance of stock rights to the current common stockholders on March 2, 2007. The current market price of the common stock at this date is $24 per share. Each common stockholder is to receive one stock warrant for each share of common stock owned. One additional share of common stock may be purchased at any time prior to April 7, 2007 for $23 and four of the stock warrants.

There are presently 20,000 shares of the $50 par preferred stock issued and outstanding. They were selling for $78 per share on March 5, 2007. No preemptive right applies to the preferred stock. In order to assure the sale of the additional 10,000 shares of the preferred stock, the board of directors also authorizes one stock warrant to be attached to each share of preferred stock in the new issue. One of these stock warrants allows the preferred stockholder to purchase one share of $10 par common stock for $18 per share at any time prior to April 7, 2007. The preferred shares with warrants attached are issued on March 6, 2007 at a price of $83 per share. The warrants begin trading in the market at $6 each.


1. Prepare the entry to record the issuance of the common stock warrants on March 2, 2007.

2. Prepare journal entries to record the following transactions:

a. The sale of the 10,000 shares of $50 par preferred stock with detachable warrants on March 6, 2007.

b. The exercise on March 19, 2007 of 6,000 of the stock warrants that had been attached to the preferred stock (the common stock price is currently $24 per share and the preferred stock is selling ex rights for $79 per share).

c. The exercise on April 2, 2007 of 120,000 stock warrants issued in conjunction with the preemptive right (the common stock is currently selling at $23.50 per share).

d. 4,000 stock warrants related to the preferred stock and 80,000 stock warrants related to the preemptive right expire on April 6, 2007.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...

This problem has been solved!

Do you need an answer to a question different from the above? Ask your question!

Step by Step Answer:

Related Book For  answer-question

Intermediate Accounting

ISBN: 978-0324300987

10th Edition

Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones

Question Details
Chapter # 16
Section: Problems
Problem: 5
View Solution
Create a free account to access the answer
Cannot find your solution?
Post a FREE question now and get an answer within minutes. * Average response time.
Question Posted: March 12, 2012 04:19:05