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Chapter 15: Question 8Q (page 810)

Explain the difference between the proportional method and the incremental method of allocating the proceeds of lump-sum sales of capital stock.

Short Answer

Expert verified

The proportional and incremental methods are both used according to the different approaches performed by the company.

Step by step solution

01

Meaning Proportional Method

A proportionate technique is a mechanism for allocating a lump-sum sale among one or more classes of securities. It is also known as the pro-rata basis of allocation.

02

Differences between proportional and incremental method

When the fair value or another good foundation for assessing relative value is available for each class of security, the proportionate technique is used to allocate the lump sum received on salesof two or more classes of securities.

The incremental method must be utilized when the fair valueof all classes of securities cannot be determined in a lump-sum transaction.

For the classes for which the value is known, the value of the securities is used. The balance is allocated to the class for which the value is unknown.

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Most popular questions from this chapter

Moonwalker Corporation issued 2,000 shares of its \(10 par value common stock for \)60,000. Moonwalker also incurred $1,500 of costs associated with issuing the stock. Prepare Moonwalker鈥檚 journal entry to record the issuance of the company鈥檚 stock.

Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.

(Treasury Stock Transactions and Presentation) Clemson Company had the following stockholders鈥� equity as of January 1, 2017

Common stock, \(5 par value, 20,000 shares issued \)100,000

Paid-in capital in excess of par鈥攃ommon stock 300,000

Retained earnings 320,000

Total stockholders鈥� equity \(720,000

During 2017, the following transactions occurred.

Feb.1 Clemson repurchased 2,000 shares of treasury stock at a price of \)19

per share.

Mar.1 800 shares of treasury stock repurchased above were reissued at \(17

per share.

Mar.18 500 shares of treasury stock repurchased above were reissued at \)14

per share.

Apr. 22 600 shares of treasury stock repurchased above were reissued at \(20

per share.

Instructions

  1. Prepare the journal entries to record the treasury stock transactions in 2017, assuming Clemson uses the cost method.
  2. Prepare the stockholders鈥� equity section as of April 30, 2017. Net income for the first 4 months of 2017 was \)130,000.

Why is a preemptive right important?

How are restrictions of retained earnings reported?
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