Stock Warrants Journal Entry
Stock warrants are the option that company provides to the investors to purchase the share at a specific price at a specific time. It provides the right to the investors but not the obligation to purchase the share. The investor has the right to purchase, it depends on their decision. However, the company has the obligation to sell the share when the investors wish to execute the right.
Share equity represents the ownership of the company. When the investors own a share of a company, it means that they become the owner of company. It depends on the number of shares that they own. When they own a large percentage of the share, they will have more influence on the company such as joint the annual meeting, voting for the board of directors, and so on.
When the company public on the capital market, the company can sell its share to various investors in the open market. The company can raise the capital by selling the ownership which is the share capital. The ownership of the company will change from one person to another when the share is traded in the capital market.
Stock warrants represent the future capital that company is highly likely to obtain from the investors. The company issue stock warrant to the investors with the promise to sell the stock to them at a specific price and date. The company has the obligation to sell the stock as promised when the investors exercise their rights.
Investors may exercise their right when the purchase price is lower than the market. They will be able to get some profit by exercising the right and purchase the shares at a cheaper price. The company has no choice but to sell the share at the agreed price. On the other hand, the investors will not purchase the share if the market price is lower. They simply give up the warrant which will be expired over time. The company cannot force the investors to purchase the share based on the price on a warrant.
Stock Warrants Journal Entry
When the company sells stock warrant to the investors, they will receive cash and has the obligation to sell the share in the future. The journal entry is debiting cash and credit warrant outstanding. It is the equity component on the balance sheet.
When the investors exercise the warrant, the company needs to record additional cash received, common stock, and additional paid-in capital. The warrant outstanding will be reversed to additional paid-in capital as well.
|Additional paid-in capital||$$$|
If the investors do not exercise the right, the warrant outstanding will be reversed to the additional paid-in capital as well.
Stock Warrants Journal Entry Example
Company ABC sells 100,000 stock warrants to investors at $ 5 per warrant. The warrant allows the investors to purchase the share at $ 20 per share while the market price is $ 25 per share. The par value of a share is $ 1 per share. As the result, all investors exercise their right and purchase the share. Please prepare a journal entry for the stock warrant.
Company sells 100,000 warrants at $ 5 each, which means they have received $ 500,000 in cash and has the warrant obligation to sell the share at $ 20. The company record cash inflow and warrant outstanding. The journal entry is debiting cash $ 500,000 and credit warrant outstanding $ 500,000.
On the exercise date, all warrant holders decide to exercise their rights. It means they can purchase 100,000 shares at $ 20 per share. The journal entry is debiting cash $ 2 million (100,000 share * $ 20 per share), warrant outstanding $ 500,000 and credit common stock $ 100,000, additional paid-in capital $ 2.4 million.
|Additional paid-in capital||2,400,000|