Question

Sandhill Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $101,000.

(a)		Prepare the journal entry for the issuance when the market price of the common shares is $176 each and market price of the preferred is $220 each.
(b)		Prepare the journal entry for the issuance when only the market price of the common stock is known and it is $172 per share.

Answer 1

PROBLEM _ A

FMV of common stock ( 500 * 176 ) = 88000

FMV of prefered stock ( 100 * 220 ) = 22000

TOTAL FMV = 88000 + 22000

= 110000

Allocation to common stock = ( FMV of common stock / total FMV of common &prefered stock ) * lumpsum received

= ( 88000 /.110000) * 101000

= 80800 $

Similarily to prefered stock = ( 22000 / 110000 ) * 101000

= 20200 $

PROBLEM - B

Lumpsum received = 101000

Allocation common stock ( 500*172) = 86000

( Here FMV of prefered stock not given FMV of common stock is directly allocated )

Allocated to prefered stock = 101000 - 86000

= 15000

journal entries

Date	Accounts Name	Debit	Credit
	problem - A
	Cash	101000
	Common stock ( 500*100)		5000
	paid in capital in excess of par - common (80800-5000)		75800
	prefered Stock (100*100)		10000
	paid in capital in excess of par - common (20200-10000)		10200

Date	Accounts Name	Debit	Credit
	problem - B
	Cash	101000
	Common stock ( 500*100)		5000
	paid in capital in excess of par - common (86000-5000)		81000
	prefered Stock (100*100)		10000
	paid in capital in excess of par - common (15000-10000)		5000

note

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