Question

Waterway Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $112,000.

(a)		Prepare the journal entry for the issuance when the market price of the common shares is $168 each and market price of the preferred is $210 each.
(b)		Prepare the journal entry for the issuance when only the market price of the common stock is known and it is $194 per share.

Answer 1

Solution -

(a)

FMV of Common (500 * $168) $84,000

FMV of Preferred (100 * $210) $21,000

Total $105,000

Allocated to Common: ($84,000/$105,000) * $112,000 $89,600

Allocated to Preferred: ($21,000/$105,000) * $112,000 $22,400

Total allocation (rounded to nearest dollar) $112,000

Now Journal Entry

Particulars Debit Credit

Cash 112,000

Common Stock (500* $10) 5,000

Paid in Capital in Excess of Par -Common (89,600 - 5,000) 84,600

Preferred Stock (100 * $100) 10,000

Paid in Capital in Excess of Par - Preferred ($22,400 - $10,000) 12,400

(b)

Prepare the journal entry fo the issuance when only the market value of the common stock is known and it is $194 per share.

Lump-sum receipt $112,000

Allocated to common (500 * $194) 97,000

Balance allocated to preferred $15,000

Now Journal Entry

Particulars Debit Credit

Cash 112,000

Common Stock (500 * $10) 5,000

Paid in Capital in Excess of Par - Common Stock ($97,000 - $5,000) 92,000

Preferred Stock   10,000

Paid in Capital in Excess of Par - Preferred Stock ($15,000 - $10,000)   5,000