Question

Sylvan Heights Company issues 119,000 shares of preferred stock for $43 per share. The stock has a fixed dividend rate of 9% and a par value of $4 per share. The company records the issuance with a debit to Cash for

A $476,000, a debit for $4.64 million to Long-term Investments, a credit to Preferred Stock for $476,000, and a credit to Additional Paid-in Capital for $4.64 million.

B $476,000 and a credit to Preferred Stock for $476,000.

C $5.12 million, a credit to Preferred Stock for $476,000, and a credit to Additional Paid-in Capital for 4.64 million.

D $5.12 million and a credit to Preferred Stock for $5.12 million.

2. Anthem Inc. issues 200,000 shares of stock with a par value of $0.12 for $161 per share. Three years later, it repurchases these shares for $91 per share. Anthem records the repurchase in which of the following ways?

• Debit Stockholders' Equity for $32.20 million, credit Additional Paid-in Capital for $18.20 million and credit Cash for $18.20 million.

• Debit Treasury Stock for $18.20 million and credit Cash for $18.20 million.

• Debit Common Stock for $24,000, debit Additional Paid-in Capital for $18,176,000 and credit Cash for $18.20 million.

• Debit Common Stock for $24,000, debit Additional Paid-in Capital for $32,176,000 and credit Cash for $32.20 million

3.Columbia Clay, Inc. issues 1.05 million shares of preferred stock with a par value of $4.50 at its market price of $28.50 per share. The issuance should be recorded with a debit to Cash for:

• $29.93 million and a credit to Preferred Stock for $29.93 million.

• $25.20 million, a credit to Additional Paid-in Capital for $4.73 million, and a credit to Preferred Stock for $29.93 million.

• $29.93 million, a credit to Preferred Stock for $4.73 million, and a credit to Additional Paid-in Capital for $25.20 million.

• $4.73 million and a credit to Preferred Stock for $4.73 million.

Answer 1

1)

Cash Account should be debited with the issue price of preferred stock.

Issue Price of Preferred Stock = Number of Preferred Shares 119,000 * Issue Price $43 = $5,117,000

Preferred Stock account is credited with par value of shares = 119,000 Shares * $ Par Value $4 = $476,000

Additional paid in Capital in Excess of Par Value = 119,000 Shares * (Issue Price 43 – par value $4)

= $4,641,000

Hence, the correct option is C $5.12 million, a credit to Preferred Stock for $476,000, and a credit to Additional Paid-in Capital for 4.64 million

2)

Anthem records the repurchase of shares in treasury account.

Repurchase of shares are recorded in Treasury Stock Account.

Repurchase of Shares Value = 200,000 Shares * Cost $91

= $18.20 million

Hence, to record this transaction following journal entry recorded as

Debit Treasury Stock $18.20 million

Credit Cash $18.20 million

Hence, the correct option is Debit Treasury Stock for $18.20 million and credit Cash for $18.20 million

3)

Issue Price of Preferred Shares = 1.05 million shares * Market price $28.50

= $29.925 million

Journal entry would be:

Debit Cash $29.93 million

Credit Preferred Stock (Par Value $4.50*1.05 million shares) $4.73 million

Credit Additional Paid in Capital in excess of par $25.20 million

The correct option is $29.93 million, a credit to Preferred Stock for $4.73 million, and a credit to Additional Paid-in Capital for $25.20 million.

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