Chapter 11, Problem 11.1AP

(a)

To determine

No-par common stock: The common stock that is issued at its fair market value is known as no-par common stock. Common stock are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receives a share of profit from the profits earned by the corporation.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

To Journalize: the issuance of common stock and preferred stock for Corporation T.

Answer to Problem 11.1AP

Record the journal entries for the issuance of common stock and preferred stock for Corporation T.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2017
January	1	Cash                                                     (1)		280,000
		Common Stock                                (2)			70,000
		Paid-in Capital in Excess of            Stated Value                              (3)			210,000
		(To record issuance of no-par common stock)
March	1	Cash                                                     (4)		636,000
		Preferred Stock                                (5)			600,000
		Paid-in Capital in Excess of Par      Value–Preferred Stock                    (6)			36,000
		(To record issuance of preferred stock)
May	1	Cash                                                     (7)		720,000
		Common Stock                                (8)			120,000
		Paid-in Capital in Excess of     Stated Value                                    (9)			600,000
		(To record issuance of no-par common stock)
September	1	Cash                                                   (10)		25,000
		Common Stock                              (11)			5,000
		Paid-in Capital in Excess of      Stated Value                                  (12)			20,000
		(To record issuance of no-par common stock)
November	1	Cash                                                   (13)		168,000
		Preferred Stock                             (14)			150,000
		Paid-in Capital in Excess of Par      Value–Preferred Stock                  (15)			18,000
		(To record issuance of preferred stock)

Table (1)

Working Notes:

Compute cash received for 70,000 common shares at $4 per share.

$\begin{array}{c}\text{Cash received= Number of shares }\times \text{ Price per share}\\ \text{= 70,000 shares × \$4}\\ \text{= \$280,000}\end{array}$ (1)

Compute the common stock value for 70,000 shares at $1 stated value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Stated value of common stock}\\ \text{= 70,000 shares × \$1}\\ \text{= \$70,000}\end{array}$ (2)

Compute the paid-in capital in excess of stated value-Common stock.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of stated value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$280,000}\left(1\right)\text{ – \$70,000}\left(2\right)\\ \text{= \$210,000}\end{array}$ (3)

Compute the cash received for 12,000 preferred shares at $53 per share.

$\begin{array}{c}\text{Cash received= Number of shares }\times \text{ Price per share}\\ \text{= 12,000 shares × \$53}\\ \text{= \$636,000}\end{array}$ (4)

Compute the preferred stock value for 12,000 shares at $50 par value per share.

$\begin{array}{c}\begin{array}{l}\text{Preferred }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of preferred stock}\\ \text{= 12,000 shares × \$50}\\ \text{= \$600,000}\end{array}$ (5)

Compute paid-in capital in excess of par value-Preferred stock.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Preferred stock value }\end{array}\right)\\ \text{= \$636,000}\left(4\right)\text{ – \$600,000}\left(5\right)\\ \text{= \$36,000}\end{array}$ (6)

Compute the cash received for 120,000 common shares at $6 per share.

$\begin{array}{c}\text{Cash received= Number of shares }\times \text{ Price per share}\\ \text{= 120,000 shares × \$6}\\ \text{= \$720,000}\end{array}$ (7)

Compute common stock value for 120,000 common shares at $1 stated value per share.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Stated value of common stock}\\ \text{= 120,000 shares × \$1}\\ \text{= \$120,000}\end{array}$ (8)

Compute paid-in capital in excess of stated value-Common stock.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of stated value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$720,000}\left(7\right)\text{ – \$120,000}\left(8\right)\\ \text{= \$600,000}\end{array}$ (9)

Compute the cash received for 5,000 common shares at $5 per share.

$\begin{array}{c}\text{Cash received= Number of shares }\times \text{ Price per share}\\ \text{= 5,000 shares × \$5}\\ \text{= \$25,000}\end{array}$ (10)

Compute the common stock value for 5,000 common shares at $1 stated value per share.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Stated value of common stock}\\ \text{= 5,000 shares × \$1}\\ \text{= \$5,000}\end{array}$ (11)

Compute paid-in capital in excess of stated value-Common stock.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of stated value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$25,000}\left(10\right)\text{ – \$5,000}\left(11\right)\\ \text{= \$20,000}\end{array}$ (12)

Compute cash received for 3,000 preferred shares at $56 per share.

$\begin{array}{c}\text{Cash received= Number of shares }\times \text{ Price per share}\\ \text{= 3,000 shares × \$56}\\ \text{= \$168,000}\end{array}$ (13)

Compute preferred stock value for 3,000 preferred shares at $50 par value per share.

$\begin{array}{c}\begin{array}{l}\text{Preferred }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of preferred stock}\\ \text{= 3,000 shares × \$50}\\ \text{= \$150,000}\end{array}$ (14)

Compute paid-in capital in excess of par value-Preferred stock.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Preferred stock value }\end{array}\right)\\ \text{= \$168,000}\left(13\right)\text{ – \$160,000}\left(14\right)\\ \text{= \$18,000}\end{array}$ (15)

Explanation of Solution

January 10: Issued 70,000 shares of common stock for cash at $4 per share.

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $280,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $70,000.
• Paid-in Capital in Excess of Stated Value is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Stated Value account with $210,000.

March 1: Issued 12,000 shares of preferred stock for cash at $53 per share.

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $636,000.
• Preferred Stock is a stockholders’ equity account and the amount has increased due to issuance of preferred stock. Therefore, credit Preferred Stock account with $600,000.
• Paid-in Capital in Excess of Par Value–Preferred Stock is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Par Value–Preferred Stock account with $36,000.

May 1: Issued 120,000 shares of common stock for cash at $6 per share.

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $720,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $120,000.
• Paid-in Capital in Excess of Stated Value is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Stated Value account with $600,000.

September 1: Issued 5,000 shares of common stock for cash at $5 per share.

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $25,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $5,000.
• Paid-in Capital in Excess of Stated Value is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Stated Value account with $20,000.

November 1: Issued 3,000 shares of preferred stock for cash at $56 per share.

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $168,000.
• Preferred Stock is a stockholders’ equity account and the amount has increased due to issuance of preferred stock. Therefore, credit Preferred Stock account with $150,000.
• Paid-in Capital in Excess of Par Value–Preferred Stock is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Par Value–Preferred Stock account with $18,000.

(b)

To determine

To post: the journal entries into stockholders’ equity accounts.

Explanation of Solution

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

Preferred stock account is a component of stockholders’ equity account with a normal credit balance.

Preferred Stock
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2017	Closing balance	750,000		March 1	Cash	600,000
				November 1	Cash	150,000
	Total	750,000			Total	750,000
				January 1, 2018	Opening Balance	$750,000

Table (2)

Paid-in Capital in Excess of Par Value–Preferred Stock account is a component of stockholders’ equity account with a normal credit balance.

Paid-in Capital in Excess of Par Value–Preferred Stock
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2017	Closing balance	54,000		March 1	Cash	36,000
				November 1	Cash	18,000
	Total	54,000			Total	54,000
				January 1, 2018	Opening Balance	$54,000

Table (3)

Common stock is a component of stockholders’ equity account with a normal credit balance.

Common Stock account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2017	Closing balance	195,000		January 10	Cash	70,000
				May 1	Cash	120,000
				September 1		5,000
	Total	195,000			Total	195,000
				January 1, 2018	Opening Balance	$195,000

Table (4)

Paid-in Capital in Excess of Stated Value–Common Stock account is a component of stockholders’ equity account with a normal credit balance.

Paid-in Capital in Excess of Par Value–Preferred Stock
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2017	Closing balance	830,000		January 10	Cash	210,000
				May 1	Cash	600,000
				September 1	Cash	20,000
	Total	830,000			Total	830,000
				January 1, 2018	Opening Balance	$830,000

Table (5)

(c)

To determine

To Prepare: the paid-in capital portion of stockholders’ equity section of balance sheet for Corporation T as at December 31, 2017.

Explanation of Solution

Prepare the paid-in capital portion of stockholders’ equity section of balance sheet for Corporation T as at December 31, 2017.

Corporation T
Balance Sheet (Partial)
December 31, 2017
Particulars	Amount ($)	Amount ($)
Stockholders’ equity
Paid-in Capital
Capital stock
6% Preferred stock, $50 par value, 20,000 shares             authorized, 15,000 shares issued	$750,000
Common stock, no par, $1 stated value, 500,000             shares authorized, and 195,000 shares issued	195,000
Total capital stock		$945,000
Additional paid-in capital
Paid-in capital in excess of par value–Preferred             stock	54,000
Paid-in capital in excess of stated value–Common             stock	830,000
Total additional paid-in capital		884,000
Total paid-in capital		$1,829,000

Table (6)