Question

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 the market price of the preferred is \(230 each. (Round to the 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.

Short answer

The total debit and credit side of the journal is $100,000.

Step-by-step solution

Meaning of Common Stock

Common stock is the stock that represents equity ownership. The common stock gets dividends from the company profit, but it has a lower priority in liquidation than the preferred share.

Calculation of Fair Value (a)

The Fair value of common (500*165)	$82,500
The Fair Value of Preferred (100*230)	23,000
	$105,500

Allocated to Common Share	$78,199
Allocated to PreferredShare	21,801
Total allocation(rounded to the nearest dollar)	$100,000

$\begin{array}{rcl}\mathrm{Allocated}\mathrm{to}\mathrm{common}\mathrm{stock}& =& \frac{\$82,500}{\$105,000}\times \$100,000\\ & =& \$78,199\\ \mathrm{Allocated}\mathrm{to}\mathrm{preffered}\mathrm{stock}& =& \frac{\$23,000}{\$105,000}\times \$100,000\\ & =& \$21,801\end{array}$

Preparing Journal Entries

S.no.	Particular	Folio	Debit $	Credit $
(a)	Cash A/c.		100,000
	Common Stock A/c.			5,000
	Paid-in Capital in excess of par common Stock A/c.			73,199
	Preferred Stock			10,000
	Paid-in Capital in excess of par- Preferred Stock			11,801
	To record for the issue of stock

Calculation of allocation to Preferred

Lump-sum receipt	$100,000
Allocated to Common	85,000
Balance allocated to preferred	$ 15,000

$\begin{array}{rcl}\mathrm{Alloction}\mathrm{to}\mathrm{preffered}\mathrm{share}& =& \mathrm{Lump}-\mathrm{sum}\mathrm{receipt}-\mathrm{Share}\mathrm{allocation}\mathrm{to}\mathrm{coomon}\mathrm{stock}\\ & =& \$100,000-\left(500\times \$170\right)\\ & =& \$100,000-\$85,000\\ & =& \$15,000\end{array}$

Preparing Journal Entries

S.no.	Particular	Folio	Debit $	Credit $
(b)	Cash A/c.		100,000
	Common Stock A/c.			5,000
	Paid-in Capital in excess of par common Stock A/c.			80,000
	Preferred Stock			10,000
	Paid-in Capital in excess of par- Preferred Stock			5,000
	To record for the issue of stock