Question

Ravonette Corporation issued 300 shares of \(10 par value ordinary shares and 100 shares of \)50 par value preference shares for a lump sum of \(13,500. The ordinary shares have a market price of \)20 per share, and the preference shares have a market price of $90 per share.

Instructions

Prepare the journal entry to record the issuance.

Short answer

Share capital – Preference amount is $5,000.

Share capital – Ordinary amount is $3,000.

Step-by-step solution

Meaning of Preference Share

Preferred shares, commonly known as preferred stock, are shares that empower the shareholders to receive the profits declared by the company before the shareholders accept the value. If the company has chosen to pay its profits to the investors, the preference shareholders are the primary ones to receive payment from the company.

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
	Cash	13,500
	Share capital-preference		5,000
	Share premium-preference		3,100
	Share capital-ordinary		3,000
	Share premium-ordinary		2,400

Working Notes:

Calculation of Share Capital –Preference Amount

$\begin{array}{rcl}\mathrm{Share}\mathrm{capital}-\mathrm{Preference}& =& \mathrm{Preference}\mathrm{share}\times \mathrm{Par}\mathrm{value}\\ & =& 100\times \$550\\ & =& \$5,000\end{array}$

Calculation of Share Capital Ordinary amount

$\begin{array}{rcl}\mathrm{Share}\mathrm{capital}-\mathrm{Ordinary}& =& \mathrm{Ordinary}\mathrm{shares}\times \mathrm{Par}\mathrm{value}\\ & =& 300\times \$10\\ & =& \$3,000\end{array}$