Question

E15-5

E15-5 (Lump-Sum Sales of Stock with Preferred Stock) 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 market price of the preferred is $230 each. (Round to 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.

Answer 1

Concepts and reason

Common stock: It refers to the ordinary shares owned by the equity shareholders of the corporation. The common stockholders enjoy the ownership of a company, but do not have any preference while receiving dividends.

Preferred stock: It refers to the shares that are owned by the preference shareholders of the corporation. The stockholders of preferred stock have a special right (preferable right) to claim on assets and earnings. They are preferable than common stockholders.

Lump – sum sales method: the lump sum sales of shares or stocks refer to common stock distributed by a company in mixture with other securities such as preferred shares or bonds. While one company obtains another, it frequently times amalgamate two or more securities as share of the buying amount.

Journal entry: The record of business transactions in a chronological order with equal amounts of debits and credits in the journal is referred to as journal entry.

Rules of debit and credit: The category of accounts determines how the increases and decreases are recorded in the said account. In other words the account category determines the rule of debit and credit for that particular account. The following are the rules of debit and credit:

1.Debit increases all asset accounts and expenses account. Debit decreases all liabilities and stockholders’ equity account.

2.Credit increases all liabilities, stockholders’ equity, and revenue account. Credit decreases all asset accounts.

Fundamentals

Par value of stock: The minimum fixed dollar amount of each share of stock stated in the company charter is known as par value of each share. It is the minimum price at which company issues or sells the share to the stockholders.

Paid in capital: Paid-in capital is the part of stockholders ‘equity appears complete the purchase of the company’s stock by investors. Paid-in capital refers to the capital stock. The main source of paid-in capital is capital contributed by investors or stockholders in the company.

Asset: The source which is possessed or controlled to generate income in the future is known as an asset. Examples: Cash, prepaid expense, Machinery, Goodwill, and Supplies. (A +) denotes increase in assets; (A –) denotes decrease in assets.

Stockholders’ equity: Stockholders’ equity refers to the shareholders claims on the assets or resources of a company, and so known also as net assets of the company, which are assets minus liabilities. Examples: Retained Earnings, Dividends, and Capital. (SE +) denotes increase in stockholders’ equity and (SE –) decrease in stockholders’ equity.

(a)

Prepare a journal entry for issuance of common stock and preferred stock.

(Working note)

Calculate fair market value of common and preferred stock:

Hence, Total fair value of stock of DM Incorporation is $105,500.

Calculate book value of common and preferred stock:

Hence, Book value of Common stock is $5,000 and book value of preferred stock is $10,000.

Calculate Paid in capital excess of par for common stock:

Hence, Paid in capital excess of par – common is $73,199.

Calculate Paid in capital excess of par for preferred stock:

Hence, Paid in capital excess of par – preferred is $11,801.

(b)

Prepare a journal entry for issuance of common stock.

(Working note)

Calculate balance amount allocated to preferred stock:

Hence, Balance allocated to preferred stock is $15,000.

Calculate book value for common stock:

Hence, Book value of common stock is $5,000.

Calculate paid in capital excess of par – common stock:

Hence, Paid in capital excess of par – common stock is $80,000.

Calculate book value of preferred stock:

Hence, Book value of preferred stock is $10,000.

Calculate paid in capital excess of par – preferred stock:

Hence, Paid in capital excess of par – preferred stock is $5,000.

[Part b]

Part b

Ans: Part a

Part b