Question

As an auditor for the CPA firm of Hinkson and Calvert, you encounter the following situations in auditing different clients.

1.		LR Corporation is a closely held corporation whose stock is not publicly traded. On December 5, the corporation acquired land by issuing 5,000 shares of its $19 par value common stock. The owners’ asking price for the land was $120,000, and the fair value of the land was $120,000.
2.		Vera Corporation is a publicly held corporation whose common stock is traded on the securities markets. On June 1, it acquired land by issuing 21,000 shares of its $11 par value stock. At the time of the exchange, the land was advertised for sale at $272,000. The stock was selling at $12 per share.

Prepare the journal entries for each of the situations above. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Concepts and reason

Journal Entry: This is the primary recording of any transaction which is entered in the financial accounting. First of all, every transaction is put into a journal entry and from there it is posted to different accounts.

Journal entry forms the basis of accounting. If a journal entry is wrong then financial books cannot provide a correct picture of the financials of the entity.

Fundamentals

Rules of debit and credit have been followed for journalizing the various transactions and these are as mentioned below:

Debit the Receiver and Credit the Giver: It is used for personal accounts. It indicates when the organization receives something from anyone then, what is received would be debited and the giver would be credited.

Debit what comes in and Credit what goes out: It is used for real accounts. It indicates when the organization purchased or receive any asset then it would be debited and on the other side, when the asset is going out of the organization then, it would be credited.

Debit all expenses and losses, credit all incomes and gains: It is used in case of a nominal account, and according to this rule all the expenses and losses incurred by the organization would be debited and on the other side, all the incomes and gain of the organization would be credited.

Common stock: These are the shares that are issued by the company against the money invested by the shareholders in the company. The common stockholders are the real owners of the company; they have a right on the dividend that is distributed by the company.

Additional paid-in the capital: It is that value that is paid by the holder of the common stock that is over and above the face value of the share. It is shown in the balance sheet in the shareholder’s equity section.

Shareholder’s Equity: It can be referred to as one of the parts of the balance sheet other than the assets and the liabilities of the company. It is also known as owner’s equity of the company. Capital contributed and retained earnings are the parts of the owner’s equity.

Stock valuation: It can be defined as the method where the fair market value of the stock is calculated with the help of using predefined formulas by considering the factors indicating various economic indicators.

Fixed Assets: These are those assets which are bought by the company for the long-term use in the business and are generally require large capital investments. Depreciation is charged on such assets except for land over their useful life.

Land- It can be defined as the assets in the form of a plot of land which is used in the business for carrying out the business activities.

1.

Record the Journal entry of the acquisition of land by the issuing of shares using MS-Excel as follows:

Working Notes:

Compute the common stock using the equation as shown below:

$\begin{array}{c}\\{\rm{Common stock}} = \left( \begin{array}{l}\\{\rm{Par value per share}} \times \\\\{\rm{Number of shares}}\\\end{array} \right)\\\\ = \$ 19 \times 5,000\\\\ = \$ 95,000\\\end{array}$

Hence, the value of a common stock is $95,000

Compute the additional paid-in capital using the equation as shown below:

$\begin{array}{c}\\{\rm{Additional paid in capital}} = {\rm{Land}} - {\rm{Common stock}}\\\\ = \$ 120,000 - \$ 95,000\\\\ = \$ 25,000\\\end{array}$

Hence, additional paid-in capital is $25,000.

2.

Record the Journal entry of the acquisition of land by the issuing of shares using MS-Excel as follows:

Working Notes:

Compute the common stock using the equation as shown below:

$\begin{array}{c}\\{\rm{Common stock}} = \left( \begin{array}{l}\\{\rm{Par value per share}} \times \\\\{\rm{Number of shares}}\\\end{array} \right)\\\\ = \$ 11 \times 21,000\\\\ = \$ 231,000\\\end{array}$

Hence, the value of a common stock is $231,000

Compute the additional paid-in capital using the equation as shown below:

$\begin{array}{c}\\{\rm{Additional paid in capital}} = {\rm{Market value of share}} - {\rm{Common stock}}\\\\ = \$ 252,000 - \$ 231,000\\\\ = \$ 21,000\\\end{array}$

Hence, additional paid-in capital is $21,000.

Compute the market value of share using the equation as shown below:

$\begin{array}{c}\\{\rm{Market Value}} = \left( \begin{array}{c}\\{\rm{Market value per share}} \times \\\\{\rm{Numbers of Share}}\\\end{array} \right)\\\\ = \$ 12 \times 21,000\\\\ = \$ 252,000\\\end{array}$

Hence, the market value of a share is $252,000

Ans: Part 1

Part 2