You are the newest member of the staff of Brinks & Company, a medium-size investment management firm. You are supervised by Les Kramer, an employee of two years. Les has a reputation as being technically sound but has a noticeable gap in his accounting education. Knowing you are knowledgeable about accounting issues, he requested you provide him with a synopsis of accounting for share issue costs.
"I thought the cost of issuing securities is recorded separately and expensed over time," he stated in a handwritten memo. "But I don't see that for IBR's underwriting expenses. What gives?"
He apparently was referring to a disclosure note on a page of IBR's annual report, photocopied and attached to his memo. To raise funds for expansion, the company sold additional shares of its $.10 par common stock. The following disclosure note appeared in the company's most recent annual report:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10-Stock Transactions (in part)In February and March, the Company sold 2,395,000 shares of Common Stock at $22.25 per share in a public offering. Net proceeds to the Company were approximately $50.2 million after the underwriting discount and offering expenses.
Required:
Write a formal memo to your supervisor. Briefly explain how share issue costs are accounted for and how that accounting differs from that of debt issue costs. To make sure your explanation is understood in context of the footnote, include in your memo the following:
a. At what total amount did the shares sell to the public? How is the difference between this amount and the $50.2 million net proceeds accounted for?
b. The appropriate journal entry to record the sale of the shares.