Early in its fiscal year, Starr purchased 1, 000 shares of Pack ordinary shares for US $54, 000. In the same transaction, Starr acquired 2, 000 detachable share purchase warrants. Two of the warrants are required to purchase one additional Pack ordinary share. The market price without the warrants was US $49 per share. The market price of the warrants was US $3.50 per warrant. Starr sold 50% of the warrants several weeks later. If the proceeds received by Starr equaled US $4, 000, it recognized a realized gain of
- US $3, 000
- US $625
- US $500
- US $0
Answer(s): B
Explanation:
The recipient of share purchase warrants should allocate the carrying amount of the shares owned between those shares and the rights based on their relative fair values. Thus, the amounts to be allocated to the ordinary shares and warrants are US $47, 250{($49 x 1, 000) - [($49 x 1, 000) +$3.50 x 2, 000)]} x $54, 000) and US $6, 750$54, 000 - $47, 250), respectively. The realized gain is therefore US $625 [$4, 000 - $6, 750 x 50%)]. An entity has issued 1.000 ordinary shares with a par value of US $10. and its credit balance in retained earnings is US $5, 000. Two proposals are under consideration. The first is a share split giving each shareholder Mro new shares for each share formerly held. The second is to declare and distribute a 10% share dividend.