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Chapter 15: 5E (page 812)

Dave Matthew Inc. issues 500 shares of \(10 par value common stock and 100 shares of \)100 par value preferred stock for a lump sum of \(100,000.

Instructions

a) Prepare the journal entry for the issuance when the market price of the common shares is \)165 each and the market price of the preferred is \(230 each. (Round to the nearest dollar.)

b) Prepare the journal entry for the issuance when only the market price of the common stock is known and it is \)170 per share.

Short Answer

Expert verified

The total debit and credit side of the journal is $100,000.

Step by step solution

01

Meaning of Common Stock

Common stock is the stock that represents equity ownership. The common stock gets dividends from the company profit, but it has a lower priority in liquidation than the preferred share.

02

Calculation of Fair Value (a)

The Fair value of common (500*165)

$82,500

The Fair Value of Preferred (100*230)

23,000

$105,500

Allocated to Common Share

$78,199

Allocated to PreferredShare

21,801

Total allocation(rounded to the nearest dollar)

$100,000

Allocatedtocommonstock=$82,500$105,000×$100,000=$78,199Allocatedtoprefferedstock=$23,000$105,000×$100,000=$21,801

03

Preparing Journal Entries

S.no.

Particular

Folio

Debit $

Credit $

(a)

Cash A/c.

100,000

Common Stock A/c.

5,000

Paid-in Capital in excess of par common

Stock A/c.

73,199

Preferred Stock

10,000

Paid-in Capital in excess of par-

Preferred Stock

11,801

To record for the issue of stock

04

Calculation of allocation to Preferred

Lump-sum receipt

$100,000

Allocated to Common

85,000

Balance allocated to preferred

$ 15,000

Alloctiontoprefferedshare=Lump-sumreceipt-Shareallocationtocoomonstock=$100,000-500×$170=$100,000-$85,000=$15,000

05

Preparing Journal Entries

S.no.

Particular

Folio

Debit $

Credit $

(b)

Cash A/c.

100,000

Common Stock A/c.

5,000

Paid-in Capital in excess of par common

Stock A/c.

80,000

Preferred Stock

10,000

Paid-in Capital in excess of par-

Preferred Stock

5,000

To record for the issue of stock

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Most popular questions from this chapter

(Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling \(4,200,000.

Jana Kingston Co.

Current liabilities

\) 300,000

Long-term debt, 10%

1,200,000

Common stock (\(20 par)

2,000,000

Retained earnings (Cash dividends, \)328,000)

700,000

\(4,200,000

Mary Ann Benson Co.

Current liabilities

\) 600,000

Common stock (\(20 par)

2,900,000

Retained earnings (Cash dividends, \)328,000)

700,000

\(4,200,000

For the year, each company has earned the same income before interest and taxes.

Jana Kingston Co.

Mary Ann Benson Co.

Income before interest and taxes

\)1,200,000

\(1,200,000

Interest expense

120,000

0

1,080,000

1,200,000

Income taxes (45%

486,000

540,000

Net income

\) 594,000

\( 660,000

At year end, the market price of Kingston’s stock was \)101 per share, and Benson’s was $63.50.

Instructions

  1. Which company is more profitable in terms of return on total assets?
  2. Which company is more profitable in terms of return on common stockholders’ equity?
  3. Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.
  4. From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
  5. What is the book value per share for each company?

Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a \(500 par, 12% subordinated debenture and 10 shares of \)5 par common stock. The units were sold to outside investors for cash at \(880 per unit. Prior to this sale, the 2-week ask price of common stock was \)40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

Instructions

  1. Prepare the journal entry to record Evans’ transaction, under the following conditions.
  2. Employing the incremental method.
  3. Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.
  4. Briefly explain which method is, in your opinion, the better method.

How are restrictions of retained earnings reported?

Washington Company has the following stockholders’ equity accounts at December 31, 2017.

Common Stock (\(100 par value, authorized 8,000 shares) \)480,000

Retained Earnings 294,000

Instructions

a. Prepare entries in journal form to record the following transactions, which took place during 2018.

1. 280 shares of outstanding stock were purchased at \(97 per share. (These are to be accounted for using the cost method.)

2. A \)20 per share cash dividend was declared.

3. The dividend declared in (2) above was paid.

4. The treasury shares purchased in (1) above were resold at \(102 per share.

5. 500 shares of outstanding stock were purchased at \)105 per share.

6. 350 of the shares purchased in (5) above were resold at \(96 per share.

b.Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2018 was \)94,000. State law requires restriction of retained earnings for the amount of treasury stock.

(Recording the Issuance of Common and Preferred Stock) Kathleen Battle Corporation was organized on January 1, 2017. It is authorized to issue 10,000 shares of 8%, \(100 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of \)1 per share. The following stock transactions were completed during the first year.

Jan. 10 Issued 80,000 shares of common stock for cash at \(5 per share.

Mar. 1 Issued 5,000 shares of preferred stock for cash at \)108 per share.

Apr. 1 Issued 24,000 shares of common stock for land. The asking price of

the land was \(90,000; the fair value of the land was \)80,000.

May 1 Issued 80,000 shares of common stock for cash at \(7 per share.

Aug. 1 Issued 10,000 shares of common stock to attorneys in payment of

their bill of \)50,000 for services rendered in helping the company

organize.

Sept. 1 Issued 10,000 shares of common stock for cash at \(9 per share.

Nov. 1 Issued 1,000 shares of preferred stock for cash at \)112 per share.

Instructions

Prepare the journal entries to record the above transactions.
See all solutions

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