Question

On March 4, 2020, Dale Co. purchased 1,000 ordinary shares of LCD at P80 per share....

On March 4, 2020, Dale Co. purchased 1,000 ordinary shares of LCD at P80 per share. On September 26, 2020, Dale received 1,000 stock rights to purchase an additional 1,000 shares at P90 per share. The stock rights had an expiration date of February 1, 2021 On September 30, 2020, LCD’s ordinary share had a market value ex-rights of P95 each and the stock rights had a market value of P5 each. What amount should Dale report on its September 30, 2020 balance sheet as the cost of the investment in stock rights?

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Answer #1

Cost of Investment in stock rights

Data given in the question:

number of shares held by Dale.co = 1000 shares @ P80 per share

number of stock rights given to Dale.co= 1000 stock rights @ P90 per share

market value of a share of LCD = P95

Dale.co should record the value of the right as the cost of stock rights as on 30.09.2020

calculation of Value of stock right

Market value of the shares already held by Dale.co = 1000*95 =95000

Add: Price to be paid for buying new shares = 1000*90 =90000

total (2000 shares)  = 95000+90000= 185000

Average price of one share = total/number of shares = 185000/2000 =92.5
Value of the right = Market value – Average price
= 95-92.5

= 2.5
Value of stock right = P2.5

Therefore, Dale.co should show P2500 (1000 shares * 2.5) as the cost of stock rights in balancesheet as on 30.09.2020

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