Question

2. Gunns Inc. issues 15,000 shares of $1 par value common stock and 25 shares of $1,000 par value, 6% preferred stock to a private investor for $630,000. The fair value of the common stock is $40 per share per share and the fair value of the preferred stock is $1,200 per share a. Prepare the journal entry to record the transaction assuming that the fair market values (FMV) for both the common and preferred stock are known and shown below. Last Name Issue Price FMV Common FMV Preferred A – E $495,000 $30 per share $2,000 per share F – L $630,000 $40 per share $1,200 per share M – R $790,000 $50 per share $1,900 per share S – Z $970,000 $63 per share $1,250 per share b. Prepare the journal entry assuming that only the FMV of the common stock is known (amount above)

Answer 1

a. Determination of fair value of common stock & preferred stock

Fair value of common stock (15000 stock*$40) Fair value of preferred stock (25 stock*$1200) Total fair value 600000 30000 630000 Issue price to investor 630000 Journal entry Accounts & Explantion Debit $ Credit $ Cash 630000 Common stock (15000*$1) 15000 Additional paid up capital-common stock (600000-15000) 585000 Preferred stock (25*$1000) 25000 Additional paid up capital-preferred stock (30000-25000) 5000

b. When only fair value of equity is known,

|Fair value of common stock (15000 stock*$40)| 600000 Issue price to investor 630000 |Fair value of preferred stock (630000-60000) 30000 Date Credit $ 15000 Journal entry Accounts & Explantion Debit $ Cash 630000 Common stock (15000*$1) Additional paid up capital-common stock (600000-15000) Preferred stock (25*$1000) Additional paid up capital-preferred stock (30000-25000) 585000 25000 5000

b.