Question

(3) Lump sum issuance of stock

Matti Corporation has issued 1,350 shares of common stock and 750 shares of preferred stock for a lump sum of $72,500 cash.

Instructions (a) Give the entry for the issuance assuming the par value of the common stock was $5 and the fair value $25, and the par value of the preferred stock was $35 and the fair value $45. (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 preferred stock has no ready market and the common stock has a fair value of $19 per share.

Answer 1

Solution-

a)

No.	General Journal	Debit ($)	Credit ($)
1.	Cash	72500
	Common Stock [1350 * $5]		6750
	Paid-in Capital in Excess of Par-Common		29500
	Preferred Stock [750 * $35]		26250
	Paid-in Capital in Excess of Par-Preferred		10000

Workings-

Common [1350 * $25]	$33750
Preferred [750 * $45]	$33750
Fair value	$67500
Common [$72500 * 33750/67500]	$36250
Preferred [$72500 * 33750/67500]	$36250

Paid-in Capital in Excess of Par-Common = [$36250 - $6750] = $29500

Paid-in Capital in Excess of Par- Preferred = [$36250 - $26250] = $10000

b)

No.	General Journal	Debit ($)	Credit ($)
1.	Cash	72500
	Common Stock		6750
	Paid-in Capital in Excess of Par-Common		18900
	Preferred Stock		26250
	Paid-in Capital in Excess of Par-Preferred		20600

Workings-

Fair value of common stock = [1350 * $19] = $25650

Paid-in Capital in Excess of Par-Common = [$25650 - 6750] = $18900

Paid-in Capital in Excess of Par-Preferred = Balance figure