Question

Nelson Corporation issues 6,000 shares of $100 par preferred stock at a price of $112 per share on December 31. A stock warrant is attached to each share of preferred stock that enables the holder to purchase one share of $10 par common stock for $25. Immediately after issuance, the preferred stock begins selling ex rights for $110 per share. The warrants (which expire in 30 days) also begin trading for $4 per warrant.

Required:

1.	Prepare the journal entry to record the sale of the preferred stock.
2.	Prepare the journal entry to record the issuance of 5,000 shares of common stock in exchange for 5,000 warrants and $25 per share.
3.	Prepare the journal entry to record the expiration of 1,000 warrants.

CHART OF ACCOUNTS
Nelson Corporation
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 189 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 305 Preferred Stock 311 Common Stock 314 Paid-in Capital-Stock Warrants 318 Additional Paid-in Capital on Preferred Stock 319 Additional Paid-In Capital From Expired Warrants 320 Additional Paid-in Capital on Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

Prepare the journal entry to record the sale of the preferred stock on December 31. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4

Prepare the journal entry to record the issuance of 5,000 shares of common stock in exchange for 5,000 warrants and $25 per share on December 31. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4

Prepare the journal entry to record the expiration of 1,000 warrants on December 31. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Answer 1

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CRDIT
1	Dec. 31	Cash (6000 x $112)		672000
2		Preferred stock (6000 x $100)			600000
3		Additional paid-in capital on preferred stock			48421
4		Paid-in capital-Stock warrants			23579

Preferred: 6000 x $110 = $660000

Stock warrants: 6000 x $4 = $24000

Preferred: [$660000/($660000 + $24000)] x $672000 = $648421

Stock warrants: [$24000/($660000 + $24000)] x $672000 = $23579

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CRDIT
1	Dec. 31	Cash (5000 x $25)		125000
2		Paid-in capital-Stock warrants (5000 x $3.93)		19650
3		Common stock (5000 x $10)			50000
4		Additional paid-in capital on common stock			94650

$23579/6000 = $3.93

Note: Rounded off to 2 decimal places in the absence of specific instructions regarding the same. Kindly round off as required.

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CRDIT
1	Dec. 31	Paid-in capital-Stock warrants ($23579 - $19650)		3929
2		Additional paid-in capital from Expired warrants			3929