STOCK RIGHTS AND EX RIGHTS

A COMPANY MAY OFFER RIGHTS, WARRANTS  OR OPTIONS ON THEIR EXISTING STOCKHOLDERS.

STOCK RIGHTS, warrants, options :

A COMPANY MAY OFFER RIGHTS, WARRANTS, OPTIONS :
         1.  to raise additional capital.
         2.  to raise the sale of particular class of securities.
         3. compensation for services received , say  for OPTIONS.

STOCK RIGHTS:

 STOCK RIGHTS IS ACTUALLY A PRIVILEGE  , OR AN OPPORTUNITY GIVEN TO A STOCKHOLDER TO ACQUIRE NEW STOCKS, BUT IT HAS A PRICE  .

 WHEN A CORPORATION ANNOUNCES RIGHTS  TO PURCHASE ADDITIONAL SHARE OF STOCK TO ITS EXISTING STOCKHOLDERS, IT SPECIFIES  A DATE ON WHICH THE RIGHTS WILL BE ISSUED.

ALL STOCKHOLDERS OF RECORD AT THE ISSUE DATE ARE ENTITLED TO RECEIVE THE RIGHTS.

BETWEEN THE ANNOUNCEMENT DATE AND THE ISSUE DATE , THAT PERIOD , THE STOCK IS SAID TO SELL  "  RIGHTS ON."

AFTER THE RIGHTS ARE ISSUED , THE STOCK SELLS   '"   ex rights " and the rights may be sold separately by the recipient or exercised that rights , that means buying additional shares using this rights.


ACCOUNTING FOR STOCK RIGHTS FOR THE INVESTOR.

THE INVESTOR WILL HAVE TWO TYPES OF INVESTMENT , THE EXISTING INVESTMENT
AND THE   VALUE OF THIS   " RIGHTS ".

THE ORIGINAL STOCKS AND THE RIGHTS HAS ITS OWN MARKET PRICE AFTER THE ISSUE DATE OF THE RIGHTS. 

THE  ISSUER OF STOCK RIGHT WILL ISSUE "RIGHTS"  TO INVESTORS  TO PURCHASE A CERTAIN NUMBER OF SHARES OF  STOCK OWNED BY THE STOCKHOLDER

SO IF A CERTAIN INVESTOR HAS 100 SHARES  AND THE ISSUER ISSUES RIGHT TO PURCHASE 1 SHARE OF SAY COMMON STOCK  , THE INVESTOR RECEIVES 100 RIGHTS. IN RIGHTS FOR EACH SHARE

THE INVESTOR NOW HAS 2 SETS OF INVESTMENTS, THE ORIGINAL SHARES AND THE RIGHTS HAVING DIFFERENT MARKET  PRICE.

the first thing to compute is the cost of the RIGHTS.

EXAMPLE:

 TIDBITS CO.  has 100 shares of stock of  MICROSOFT  common at  200.00 per share.  Microsoft issues rights to purchase 1 share of common for 100.00   for every 5 shares of common  TIDBITS receives e 100 rights .therefore they are entitled  to subscribed for 20 shares.

TIDBITS  is now entitled to record the cost of the  100 rights.  the problem is,  considering that there are already 2 types of investment,  the issue of pricing comes into play , how much for the rights and how much for the common shares.

Now,  after the issue date of the rights , the existing stock is called STOCK EX RIGHTS and can be sold , in the  prevailing market price    the same with THE RIGHTS  having  a market price .

MICROSOFT stocks has a market price, selling  EX RIGHTS  AT   130.00 per share and the RIGHTS SELLS AT 5.00  EACH.  . SINCE THERE ARE 2 INVESTMENT , A SPECIFIC COST MUST BE COMPUTED FOR EACH OF THEM BY WAY OF  RATIO AND PROPORTION.  AS  FF:

                             PRICE OF STOCK EX RIGHT                  130.00   96.3%
                             PRICE OF RIGHTS                                        5.00     3.7%
                                    TOTAL COMBINED PRICE               135.00    100%

DIVIDING 130.00 AGAINST 135.00, THE SHARE OF STOCK EX RIGHT TO THE TOTAL COMBINED PRICE IS   96.3%
DIVIDING 5 BY 135  IS     3.7%.   Now considering that the stated price or the par value or the book value of the INVESTMENT OF TIDBITS  is  at present 200.00 , this 3.7% must be multiplied to the 200.00 to get the equivalent cost of the rights in relation to the  200.00 which is the original investment cost.

NOW APPLYING THESE PERCENTAGES  TO THE BOOK VALUE PER SHARE  WHICH IS 200.00  OF THE COMMON STOCK   TH EX RIGHTS is  192.60  and RIGHTS  7.40

            96.3%    X   200.00  +=   192.60   the cost per share of common stock
              3.7%    X  200.00       =  7.40   the cost per right  of THE RIGHTS
          original price of stock  200.00

                   

THE COST OF RIGHTS NOW IS 7.40 PER RIGHTS . TIDBITS NOW CAN MAKE AN ACCOUNTING ENTRY RECOGNIZING THE 100 RIGHTS  RIGHTS IN EXCHANGE TO EQUIVALENT COMMON.STOCK

               INVESTMENT IN MICROSOFT STOCK RIGHTS ( 100  rights X 7.40)   740.00
                  INVESTMENT IN MICROSOFT COMMON                                                740.00

take note that your original investment in stock is credited by the cost of 100 rights   740.00 and was replaced by your investment in  stock rights , debited as shown on the entry.  your balance of original investment is 19,260.00  (20,000 less 740.00 ) .

  composition of your investment is as ff:

             cost of rights   (100 X 7.40)                                               740.00
             balance of your orignal investment (192.60 X 10           19,260.00
                total                                                  20,000.00



TIDBITS DECIDED TO EXERCISE THAT RIGHTS rather than selling it,  TO PURCHASE THE 20 SHARES  AT 100.00 .

THE ENTRY IS

                 INVESTMENT IN COMMON    2,740.00

                              INV IN STOCK RIGHTS                   740.00
                               CASH                                               2000.00            CASH OUTLAY

    THE AMOUNT IS COMPUTED AS FF

    COST OF THE RIGHTS                                          740.00
    COST OF STOCKS  100.00 X 20 SHARES          2000.00
      TOTAL COST OF 20 SHARES                            2,740.00
 
        THE COST OF THE RIGHTS OF 740.00 IS GOOD GOOD FOR 20 SHARES, SO  740.00 DIVIDE 20 SHARE IS    37.00 PER SHARE .  SO IN ACQUIRING THE 20 SHARE IT COST YOU ONLY 740.00 BECAUSE THE RIGHTS IS ONLY 37.00 PER SHARE.


NOW SINCE, THAT 740.00 IS APPLICABLE ONLY TO THE RIGHTS , WHICH ENTITLES TIDBITS TO 20 SHARES  HENCE  THIS 740.00 IS GOOD FOR 20 SHARES  OR 37.00 PER SHARE ,  BUT SINCE TOGETHER WITH THAT RIGHTS , THE COMPANY RECEIVES A 20 SHARES STOCKS PRICED AT 100.00 PER SHARE , SO THE TOTAL PRICE OF THE 20 SHARES IS COMPOSED OF:

                       RIGHT                        37.00 PER SHARES  X   20 SHARES  740.00
                      STOCKS SOLD AT  100.00 PER SHARE  X  20 shares        2,000.00
      TOTAL COST OF 20 SHARES137.00 x 20                                           2,740.00       

THE STOCKS OF TIDBITS IS NOW COMPOSED OF  TWO PRICED SHARES AS FF:

              20 SHARES VALUED  137.00              2740.00
            100 SHARES VALUED AT  192.60     19,260.00
               TOTAL PER BOOKS                        22,000.00 


THIS RIGHTS HOWEVER CAN BE SOLD INSTEAD OF CONVERTING IT TO SHARES OF STOCKS.

SO ASSUMING THE RIGHTS WAS SOLD AT  4.00 WHICH IS LOWER THAN THE ITS REAL PRICE OF 7.40


     CASH   4.00 x 100 rights                                                      400.00
    LOSS ON SALES OF STOCK RIGHTS                              340.00
                INVESTMENT IN MICRO STOCK RIGHTS  7.40 x 100                 740.00

                                   
WHAT ARE THE FIGURES THAT NEED TO KNOW :

in this example

1.  how many rights    =   100 rights,
2.  6  rights are needed to acquire 1 share
3.  the offered price of the additional share .  110.00 
4.  the acquisition cost  of the existing stocks  which is 200.00
5. the present market price of the STOCKS AT EX RIGHTS     130.00
6.                                                            the price of the       RIGHTS  IS  5.00
7.  The total price of STOCKS EX RIGHTS and the RIGHTS               135.00
8.   What is the ratio of  130.00 market price of EX RIGHTS  against the combined price of EX RIGHTS AND RIGHTS of 135.00 ,   WHICH IS 96.3%
9.   THE ratio of  5 .00 market price of  RIGHTS against the total  135.00  which is 3.7%
10.    the cost of right  therefore  is 3.7 % x  200.00    = 7.40 per rights.
11.    total cost of rights    100 rights x 7.40       740.00  
12 . the total cost of rights converted to 20 shares is  740.00 dive 20   = 37.00 per share
13.  the market price of stock at the exercised date 110.00 , fortunately is the same with the price being offered at issue date of 110.00 also.  this may be differ at the time of exercising.


IN SUMMARY YOU MUST  KNOW how to determine THE FF:

1. the acquisition cost of the the existing stocks.
2.  how many rights is needed to purchase 1 share.
2.  the  market price of the RIGHTS AND THE STOCK EX RIGHTS
3.  the ratio of the rights against the total rights and the stock ex rights
4.  compute the equivalent relative price of the rights in relation to the original acquistion cost of the stocks.
5.  the total cost of the rights, after getting the no. 4.
6.  the cost per share of the total shares that can be exercised.
7. how many rights were exercised and rights sold if any.
8. how much is the price of rights if sold
9. how much is the market price of stocks at the time of exercising the rights. if no mentioned , presumed to be the price announced at the time of offering.   


IMPORTANT ISSUES TO REMEMBER:
  1.  it is not automatic that when a price is mentioned on the RIGHTS, it is already its price, NO.  because when acquiring a RIGHT,  your investment in stocks is composed of two things,  the original investment and the RIGHTS,  but since there are now two prices , one for right and one for the stocks itself, IT IS NECESSARY THAT AN ALLOCATION OF THE  ORIGINAL PRICE OF THE STOCK BE MADE INTO TWO PARTS. , that is why you get the ratio of the  price of  RIGHTS  against the total combined market price of the STOCKS  AND THE RIGHTS  as explained above, and multiplied that ratio of RIGHTS   to the original cost per share to get the equivalent real cost of the RIGHTS.

PROBLEM:

J. WALTER bought 2000 shares of LAWTON MINING STOCK FOR   15.00 PER SHARE  ON APRIL 3, 1995. ON JUNE 22,  LAWTON ISSUED STOCK RIGHTS OF COMMON STOCK, ONE RIGHT FOR ONE SHARED OWNED. THE TERMS OF THE EXERCISED REQUIRED 5 RIGHTS FOR EVERY SHARE OWNED  FOR 15.00.  THE STOCK IS SELLING EX RIGHTS AT 19.00 AND THE RIGHTS HAVE A MARKET VALUE OF 1 EACH.  J WALTER EXERCISED 1,000 RIGHTS ONLY AND SOLD THE REMAINING RIGHTS AT 1.40 EACH.

REQUIRED.  ENTRIES TO RECORD THE RIGHTS, AND THE EXERCISED OF THE 1,000 RIGHTS AND THE SELLING OF THE REMAINING RIGHTS.


given facts:
1.  acquisition cost of THE  2000 shares of  stocks  at   15.00  per share
2.  market price of rights     1.00,   markett price of  EX RIGHTS    19.00
3.   one right for every share held.,  required 5 rights for each share held
4.   price of the stock at exercised date is also 15.00

   market price of  EX RIGHTS             19.00
   market price of  RIGHTS                     1.00
      TOTAL                                           20.00

  ratio of 1.00 vs. 20.00 is  5%.
  equivalent price of right vs.  acquisition cost of share  = 5% x 15.00 =  0.75 per rights
total cost of right  ( .75 x 2000 rights  )    =1,500.00

journal entry
1.
                INVESTMENT IN STOCK RIGHTS          1500.00
                     INVESTMENT IN STOCKS                               1500.00
           TO record the receipt of 2000 rights to allow purchase of 400 shares at 15.00

journal entry  2

              INVESTMENT IN STOCK        3,750.00
                  INV. IN STOCK RIGHTS                          750.00 (   1000 rights X  .75 )
                  CASH                                                        3,000   (   200 shares X  15.00
              to record exercised of rights, acquiring 200 shares at 15.00

                cost per share of the additional  for 200 shares as result of the exercised:
                                   1,500.00 divide 400 shares       3.75
                                    price of stock per share           15.00
                                    total per share                          18.75
                                  x  no. of shares exercised            200
        TOTAL COST OF 200 SHARES acquired         3,750.00

JOURNAL ENTRY NO. 3

                CASH                                             1,400.00    ( 1000 rights x  1.40)
                        gain on sale of rights                                      650.00
                       INVESTMENT IN STOCK RIGHTS          750.00
         to sell the 1000 rights at 1.40, whose cost is .75  .


PROBLEM 2.

 JACK CO. HOLDS SHARE OF SHELL  AS FF:
          LOT  A        75 SHARE AT 80.00 PER SHARE
          LOT  B       125 SHARES AT 88.00 PER SHARE

   IN 1996  jack CO. receives 200 rights to purchase SHELL SHARE  AT 75.00 PER SHARE.. SIX RIGHTS ARE REQUIRED TO PURCHASE ONE SHARE. AT ISSUE DATE, THE RIGHTS MARKET PRICE IS 4.00  AND THE STOCK EX RIGHTS IS SELLING 96.00 . JACK CO. USED RIGHTS TO PURCHASE 30 ADDITIONAL SHARES . the market price of stocks fell to 92.00  and JACK CO.  ALLOWED THE UNEXERCISED RIGHT TO LAPSE.  JACK IS USING FIRST IN FIRST OUT METHOD..

REQUIRED MAKE ENTRIES TO RECORD THE RECEIPT OF RIGHTS AND THE EXERCISED OF RIGHTS AND THE UNEXERCISED RIGHTS.

1.    given :   200 rights  broken down as ff:

        75 rights is equivalent to 12.5 additional shares     75shares divide 6     = 12.5 shares
       125 rights is equivalent to 20.83 additonal shares  125 shares divide 6  = 20.833 shares
2.   1 share for every 6 rights 
 2.  the rights is priced at 4.00 and ex rights is 96.00 or total 100.00
3.  rights is 4% of the 100.00
4.   4% x  80.00 =   3.20 per rights of 75 shares
5.   4%  x 88.00 = 3.52   per rights of 125 shares
6.   exercised the 180 rights or 30 additional shares  ,  3.333 rights lapse
7.      first rights to go is  75 rights at 3.20  =  240.00
8       next batch to go is 105 rights at 3.52= 369.60
9. total stock rights exercised                        609.60
10.  the new 30 additional share are valued as ff:
           cost using the rights  of first lot  240.00 divide 12.5 shares= 19.20 per share
           market price time of exercise                                               92.00 per share
                 total for first lot                                                           101.20 per share x12.5 = 1390.00
           cost using the rights for 2nd lot  440.00 divide 20.83share  = 21.12\
            market price                                                                         92.00
                    total  2nd lot                                                               113.12 x              17.5=1,979.60
                        total..................................................................................................  30  = 3,369.60
7.