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cinnamon
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Joined: 12 Aug 2008
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Posts: 312

Posted: 06 Apr 2009 at 07:14 \| IP Logged

Here is a question from Becker:

On March 4, 1992, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, 1992, 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, 1993. On September 30, 1992, 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, 1992, balance sheet for investment in stock rights?

Answer is 4,000.

The formula used says: FMV rights/(FMV rights+FMV stock)=5%

5/(5+95). Then it multiplies with 80,000 cost of stock. I don't get it.The formula is similar to the one used for bonds with detachable warrants, but then I mess it all up. Why we use the $80,000?Where in Becker book is there a rule like that? Thank you all!

cinnamon
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Joined: 12 Aug 2008
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Posts: 312

Posted: 06 Apr 2009 at 07:29 \| IP Logged

I forgot to mention that today is not really my day. I'm feeling so overwhelmed and blue about this whole thing that I keep making silly mistakes. My confidence hit the bottom and questions like the one above are not doing any good. Thanks for reading.

divyagovil1
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Joined: 30 Jan 2009
Location: India
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Posted: 06 Apr 2009 at 08:06 \| IP Logged

Honestly speaking, I didn't find this rule in Becker while doing F7. Only in the passmaster.

I also attempted this question wrong two times in a row. Per my understanding, they are calculating the cost of stock rights based upon the cost of shares Evan already invested in...

1,000 shares * $80 pe share = $80,000

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Divya - CO State

Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011

cinnamon
Major Contributor

Joined: 12 Aug 2008
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Posts: 312

Posted: 06 Apr 2009 at 09:39 \| IP Logged

Thanks for answering! It's one of those questions that make you wonder what is happening. You said that they are calculating the cost of stock rights based upon the cost of shares Evan already invested in...

You are right, so I guess that the second sentence in the question is merely a distractor. I ve searched the Becker book and only in Chapter 5 in detachable warrants I have found something similar to this question. (F5-56 and F5-57-entries performed in the investor's side). "Let's just hope for the best"

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