Question
In: Accounting
E15.5 Hartman SE issues 500 shares of 10 par value ordinary and 100 shares of 100 par value preference shares for a lump sum of 100,000.
Instruction.
a. Prepare the journal entry for the issuance when the fair value of the ordinary shares is 168 each and fair value of the preference shares is 210 each.
b. Prepare the journal entry for the issuance when only the fair value of the ordinary shares 170 per share is known.
Solutions
Expert Solution
a. Proportional mehod
| Number | Amount | Total | Percent | ||
| Ordinary shares | 500 | 168 | 84,000 | 80% | |
| Preference shares | 100 | 210 | 21,000 | 20% | |
| Fair market value | 105,000 | 100% | |||
Allocation:
| Ordinary | Preference | |
| Price | 100,000 | 100,000 |
| Allocation | 80% | 20% |
| Total | 80,000 | 20,000 |
Journal entries:
| Cash | 100,000 | ||||
| share capital - ordinary | 5,000 | ||||
| Share premium - ordinary | 75,000 | ||||
| Share capital - preference | 10,000 | ||||
| Share premium - preference | 10,000 | ||||
b. Incremental method
| Number | Amount | Total | ||
| Ordinary shares | 500 | 170 | 85,000 | |
| Preference shares | 100 | 15,000 | ||
| Fair market value | 100,000 | |||
Journal entries:
| Cash | 100,000 | ||||
| share capital - ordinary | 5,000 | ||||
| Share premium - ordinary | 80,000 | ||||
| Share capital - preference | 10,000 | ||||
| Share premium - preference | 5,000 | ||||
For instruction (a), we use proportional method and for (b) we use incremental method.
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