Equity

Question 1

Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants’ fair value and the preferred stocks’ par value. The preferred stocks’ fair value was not determinable. What amount should be assigned to the warrants outstanding?

Answer 1

The fair value of the warrants.

The proceeds should be allocated between the preferred stock and the detachable stock purchase warrants based on their relative fair market values at date of issue. If the relative fair values are not known, then the fair value of either security is used. In this question, the fair value of the warrants is known, but the fair value of the preferred stock without the warrants is not. Therefore, the amount assigned to the warrants is the fair value of the warrants. The remaining amount of the proceeds are assigned to the preferred stock.

Question 2

The condensed balance sheet of Adams & Gray, a partnership, at December 31, year 1, follows:

Current assets $250,000
Equipment (net) 30,000
Total assets $280,000
Liabilities 20,000
Adams, capital 160,000
Gray, capital 100,000
Total liabilities and capital $280,000

On December 31, year 1, the fair values of the assets and liabilities were appraised at $240,000 and $20,000, respectively, by an independent appraiser. On January 2, year 2, the partnership was incorporated and 1,000 shares of $5 par value common stock were issued. Immediately after the incorporation, what amount should the new corporation report as additional paid-in capital?

Answer 2

$215,000

Additional Paid-in Capital is credited for the difference between the fair value of the net assets contributed and the stock’s par value.

Assets (at fair value) 240,000
Liabilities (at fair value) 20,000
Common stock (1,000 × $5) 5,000
APIC 215,000