Question

Recording Common and Preferred Stock Transactions

Gilmore Company has 20,000 authorized shares of common stock, $2 par, and also 20,000 authorized shares of preferred stock, $10 par.

Required

Record journal entries for the following separate transactions. Analyze and record each transaction separately.

a. On January 1, 2020, Gilmore sold 720 shares of common stock and 360 shares of preferred stock for a lump sum of $22,140. The common stock had been selling during the current week at $25 per share, and the preferred at $12 per share. Round amounts to the nearest dollar.

b. On January 1, 2020, Gilmore issued 324 shares of preferred stock for used equipment. The equipment had been appraised at $4,320, and the book value recorded by the seller was $2,160. A reliable determinable fair value on the preferred stock has not been established.

c. Assume that the 36,000 shares of preferred stock are callable for $12 per share at the option of the issuer, Gilmore. After issuing 900 shares of callable preferred stock on January 1, 2020, for $12, Gilmore recalled 180 shares of preferred stock on June 30, 2020, for $12. Record the entries for Gilmore on January 1, 2020, and on June 30, 2020.

d. Assume that each of the 36,000 shares of preferred stock is convertible into 2 shares of common stock at the option of the stockholder. After issuing 900 shares of convertible preferred stock on January 1, 2020, for $12, 180 shares of preferred stock were converted into common stock on June 30, 2020. Record the entries for Gilmore on January 1, 2020, and on June 30, 2020, assuming that the fair value of the preferred stock was $16 per share on June 30, 2020.

Answer 1

Answer –

In the Books of Gilmore Company

Journal Entries as -

Date	Accounts & Explanation	Debit	Credit
January 01, 2020	Cash A/c or Bank A/c…………………………………………DR.           To Common Stock Capital A/c           To, Preference Stock Capital A/c           To, Securities Premium A/c (Being, 720 shares of common stock issued at $ 2 each and 360 shares of preference stock issued at $ 10 each along with premium)	$22,140	$1,440 $3,600 $17,100
January 01, 2020	Equipment (Used) A/c …………………………………………DR.          To, Preference Stock Capital A/c (Being, issue of 324 shares of preference stock at par, i.e, $ 10 each for purchase of used equipment) [ Note – it is assumed that – (1) 324 shares of preference share issued at $ 10 each ; (2) the value of equipment was appraised before purchase of equipment for NEW equipment ; (3) the book value of recorded by seller for OLD equipment price. Here Company purchased old used equipment not OLD priced equipment nor NEW priced equipment. ]	$3,240	$3,240
January 01, 2020 June 30, 2020	Cash A/c or Bank A/c ………………………………………….DR         To, Preference Stock Capital A/c          To, Securities Premium A/c (Being, 900 shares of callable preference stock issued ) Preference Stock A/c …………………………………………DR Securities Premium A/c ……………………………………….DR           To, Cash a/c or Bank A/c (Being, 180 shares recalled of preference stock at $ 12 per share) [ Note – here in above both journal entries it is assumed that Preference stocks issued at $ 10 per share along with premium)	$10,800 $1,800 $360	$9,000 $1,800 $2,160
January 01, 2020 June 30, 2020	Cash A/c or Bank A/c ………………………………………….DR         To, Convertible Preference Stock Capital A/c          To, Securities Premium A/c (Being, 900 shares of convertible preference stock issued at premium) Convertible Preference Stock A/c ……………………………DR           To, Common Stock Capital A/c (Being, 180 shares convertible of preference stock converted into 360 common share (180 * 2 = 360shares)) [ Note – here in above journal entries it is assumed that Preference stocks issued at $ 10 per share as its face value)	$10,800 $1,800	$9,000 $1,800 $2,880