91Ó°ÊÓ

Seles Corporation’s charter authorized issuance of 100,000 shares of \(10 par value common stock and 50,000 shares of \)50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others.

1. Issued a \(10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for \)106 a share.
2. Issued 500 shares of common stock for equipment. The equipment had been appraised at \(7,100; the seller’s book value was \)6,200. The most recent market price of the common stock is \(16 a share.
3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to \)10,800. The common had been selling at \(14 and the preferred at \)65.
4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of \(16 per share; the equipment has a fair value of \)6,500.

Instructions

Record the transactions listed above in journal entry form.

Step by step solution

01

Meaning of Preferred Stock

Preferred Stock can be defined as a special type of equity that gives shareholders priority in dividend distribution. In the case of liquidation of company, preferred is paid first in the comparison of common.

02

Preparing Journal Entries (1)

Date	Particular	Debit ($)	Credit ($)
	Cash	10,000
	Discount on Bonds Payable	106
	Bond Payable		10,000
	Preferred Stock		50
	Paid-in Capital in Excess of Par Preferred Stock ($106-$50)		56

03

Preparing Journal Entries (2)

Date	Particular	Debit ($)	Credit ($)
	Equipment	8,000
	Common Sock		5,000
	Paid-in Capital in Excess of Par Common Stock		3,000

Working Notes:

$\begin{array}{rcl}\mathrm{Equipment}\mathrm{amount}& =& \mathrm{Issued}\mathrm{share}×\mathrm{per}\mathrm{value}\\ & =& 500×\$16\\ & =& 8,000\end{array}$

(It is assumed that stock is regularly traded, the value of the stock would be used). If the stock is not regularly traded, the equipment would be recorded at its estimated value.

04

Preparing Journal Entry (3)

Date	Particular	Debit ($)	Credit ($)
	Cash	10,800
	Preferred Stock		5,000
	Paid-in Capital in Excess of Par Preferred Stock		974
	Common Stock		3,750
	Paid-in Capital in Excess of Par Common Stocks($,826-$3,750)		1,076

Working Notes:

$\begin{array}{rcl}\mathrm{Fair}\mathrm{value}\mathrm{of}\mathrm{common}\mathrm{share}& =& \mathrm{Shares}×\mathrm{per}\mathrm{value}\mathrm{of}\mathrm{shares}\\ & =& 375×\$14\\ & =& \$5,250\\ \mathrm{Fair}\mathrm{value}\mathrm{of}\mathrm{preferred}\mathrm{share}& =& \mathrm{Shares}×\mathrm{per}\mathrm{value}\mathrm{of}\mathrm{shares}\\ & =& 100×\$65\\ & =& \$6,500\\ \mathrm{Total}\mathrm{fair}\mathrm{value}& =& \mathrm{Common}\mathrm{fair}\mathrm{value}+\mathrm{Preferred}\mathrm{fair}\mathrm{value}\\ & =& 4,250+6,500\\ & =& \$11,750\\ \mathrm{Allocation}\mathrm{to}\mathrm{common}& =& \frac{\mathrm{Fair}\mathrm{value}\mathrm{of}\mathrm{common}}{\mathrm{Total}\mathrm{fair}\mathrm{value}}×\mathrm{Cash}\\ & =& \frac{\$5,250}{\$11,750}×\$10,800\\ & =& \$4,826\\ \mathrm{Allocation}\mathrm{to}\mathrm{preferred}& =& \frac{\mathrm{Fair}\mathrm{value}\mathrm{of}\mathrm{preferred}}{\mathrm{Total}\mathrm{fair}\mathrm{value}}×\mathrm{Cash}\\ & =& \frac{\$6,500}{\$11,750}×\$10,800\\ & =& \$5,974\\ \mathrm{Total}\mathrm{allocated}\mathrm{value}& =& \mathrm{Allocation}\mathrm{to}\mathrm{common}+\mathrm{Allocation}\mathrm{to}\mathrm{preferred}\\ & =& \$4,826+\$5,974\\ & =& \$10,800\end{array}$

05

Preparing Journal Entry (4)

Date	Particular	Debit ($)	Credit ($)
	Equipment	6,500
	Preferred Stock		2,500
	Paid-in Capital in Excess of Par Preferred Stock ($3,300-$2,500)		800
	Common Stock		2,000
	Paid-in Capital in excess of par Common Stock ($3,200-2,000)		1,200

Working Notes:

$\begin{array}{rcl}\mathrm{Value}\mathrm{assigned}\mathrm{to}\mathrm{preferred}& =& \mathrm{Fair}\mathrm{value}-\mathrm{Market}\mathrm{value}\\ & =& \$6,500-\$3,200\\ & =& \$3,300\end{array}$

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