Question

During 2018, Company A has the following transactions involving its common and preferred stock:

• Issued 20,000 shares of $8 par common stock for $26 a share; brings total shares outstanding to 50,000 shares
• Issued 6,000 shares of $100 par, 6%, cumulative preferred stock for $150 per share
• When market value of the common stock reached $15 a share, Company A declared a 3-for-1 stock split, reducing the par value to $188 per share
  The following is required:
  1. Prepare a journal entry for each transaction.
  2. Discuss the right of shareholders of capital stock for company A that they are entitled to.
  3. Company A is formed as a corporation and therefore, its shareholders have limited liability. Limited liability means that stockholders can only lose the amount of their investment. Discuss how this limited liability affects a corporation.  

Answer 1

1) JOURNAL ENTRIES:

Issued 20,000 shares of $8 par common stock for $26 a share; brings total shares outstanding to 50,000 shares

Bank A/c....Dr (20,000 * $26) $520,000

Share Capital A/c...Cr (20,000 * $8) $160,000

Paid in exess of Par A/c...Cr (20,000 * $ $360,000

Issued 6,000 shares of $100 par, 6%, cumulative preferred stock for $150 per share

Bank A/c...Dr (6,000 * $150) $900,000

Preference Stock A/c...Cr (6,000 * $100) $600,000

Paid in excess of par A/c....Cr (6,000 * $50) $300,000

Company A declared a 3-for-1 stock split, reducing the par value to $188 per share

When a company splits its shares, there is no journal entry is required to be posted. The Total Value of the shares remains same, while the number of outstanding shares and the value pe share changes. The total Outstanding shares will be 50,000 * 3 = 150,000 shares.

2) Rights of shareholders of capital stock of a company A

The rights of the common stcok and preferred stock sharholders are as follows

1) Common stock shareholders have voting rigts while the preferred stock shareholders do not have.

2) Common share holders are paid the dividends after paying to the preference sharholders.

3) The cummulative preference shareholders gets the dividends cummulated for which the dividends are not paid for the earlier periods. While the common shareholders do not have such rights.

4) In case of liquidation also the preference share holders are paid first prior to the common stock holders.

5) Common shareholders are given primptive rights to purchase the shares before issuing it to the general public.

3) How Limited Liability affects the corporation?

In Limited Liability corporation, the shareholders liabilities are limited to their investments. It means the investors of the company are not unders risks if the company fails and is under huge losses which are in excess of its investments. So, the shareholder can participate wholly in the growth of the company and not in its dets and obligations. Without limited laibility the investors will not show interest in investing in the company. So, if a company requires more capital , it has to. register as a Limited Liability corporation in order to attrcat the customers to invest in the copany and gain more capital.