Equity

Question 1

Stock Rights

On March 4, 20X1, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, 20X1, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, 20X2. On September 30, 20X1, LVC’s common stock had a market value, ex-rights, of $95 per share and the stock rights had a market value of $5 each. What amount should Evan report on its September 30, 20X1, balance sheet for investment in stock rights?

Answer 1

The investor receiving stock rights must allocate a portion of the purchase price of the investment that “carried” the rights. Here, although the stock rights were received 6 months after the purchase, the rights still “ride” with the purchase. Thus, the stock rights are allocated a portion of the purchase price based on the market value of the rights as a percentage of the total market value of the stock investment plus the rights at the balance sheet date:

   Cost of shares acquired = 1,000 x $80 = $80,000 Cost allocated to stock rights = $80,000 ($5 / ($95 + $5))
                           = $80,000 ($5 / $100)
                           = $4,000