Question

Problem 6-Lump sum issuance of stock.PMP Corporation has issued 4,000 shares of common stock and 300 shares of preferred stock for a lump sum of $100,000 cash.Instructions(round to nearest dollar)

(a)Give the entry for the issuance assuming the par value of the common stock was $5 and thefair value $25, and the par value of the preferred stock was $20 and the fair value $40. (Each valuation is on a per share basis and there are ready markets for each stock.)

(b)Give the entry for the issuance assuming the same facts as (a) above except the commonstock has no ready market and the preferred stock has a fair value of $45per share.

Answer 1

a)
Calculation of amount allocated to common stock and preferred stock
We would allocate the lumpsum issue based on the fair value of common stock and preferred stock
Fair value of common stock	(4000*25)	$100,000
Fair value of preferred stock	(300*40)	$12,000
Total fair value		$112,000
Issue price of common stock = 100000*(100000/112000)	89285.7143
Issue price of preferred stock = 100000*(12000/112000)	10714.2857
Journal entry
Particulars	Debit	Credit
Cash	$100,000.00
Common stock (4000*5)		$20,000.00
Paid in capital excess of par - Common stock		$69,285.71
Preferred stock(300*20)		$6,000.00
Paid in capital excess of par - Preferred stock		$4,714.29
(To record issue of common and preferred stock)
Explanation
The preferred stock and common stock are issued which would increase their value and hence they are credited
Both preferred and common stock are issued above their par value and so the excess price over par is credited to paid in capital
The issue of cash will lead to cash inflow and so cash balance would increase and so cash is debited.
b)
Particulars	Debit	Credit
Cash	$100,000.00
Common stock (4000*5)		$20,000.00
Paid in capital excess of par - Common stock		$66,500.00
Preferred stock(300*20)		$6,000.00
Paid in capital excess of par - Preferred stock (300*(45-20))		$7,500.00
(To record issue of common and preferred stock)
Value of common stock = (Total lumpsum - Value of preferred stock)
Value of common stock = (100000 - 13500)
Value of common stock	$86,500
Par value of common stock	$20,000
Paid in capital excess of par	$66,500
Explanation
The preferred stock and common stock are issued which would increase their value and hence they are credited
Both preferred and common stock are issued above their par value and so the excess price over par is credited to paid in capital
The issue of cash will lead to cash inflow and so cash balance would increase and so cash is debited.