Chapter 11, Problem 11.3P

Recording Transactions Affecting Stockholders’ Equity

King Corporation began operations in January of the current year. The charter authorized the following stock:

Preferred stock: 10 percent. $10 par value. 40,000 shares authorized

Common stock: $5 par value, 85,000 shares authorized

During the current year, the following transactions occurred in the order given:

1. a. Issued 66,000 shares of common stock for $9 cash per share.
2. b. Sold 9,000 shares of the preferred stock at $20 cash per share.
3. c. Sold 1,000 shares of the preferred stock at $20 cash per share and 2,500 shares of common stock at $10 cash per share.

Required:

Provide the journal entries required to record each of the transactions in (a) through (c).

To determine

Prepare the journal entries for given transaction.

Explanation of Solution

Common stock:

These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

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.

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Journal entries for given transaction are as follows:

a. Issued 66,000 common shares at $9 per share:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A) (2)		594,000
	Common stock (+SE) (1)			330,000
	Additional paid-in capital, common stock (+SE) (3)			264,000
	(To record the issuance of common stock)

Table (1)

• Cash is an assets account and it increased the value of asset by $594,000. Hence, debit the cash account for $594,000.
• Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $330,000. Hence, credit the common stock for $330,000.
• Additional paid-in capital is a component of stockholder’s equity and it increased the value of stockholder’s equity by $264,000. Hence, credit the additional paid-in capital for $264,000.

Working note:

Calculate the value of common stock

$\begin{array}{c}\text{Common stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=66,000 shares}\times \text{\$5}\\ \text{=\$330,000}\end{array}$ (1)

Calculate the total cash received

$\begin{array}{c}\text{Total amount of cash received =}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=66,000 shares}\times \text{\$9}\\ \text{=\$594,000}\end{array}$ (2)

Calculate the value of additional paid in capital

$\begin{array}{c}\text{Additional paid-in capital = }\left(\begin{array}{l}\text{Total cash received (2)}-\\ \text{Common stock value (1)}\end{array}\right)\\ =\left(\$594,000-\$330,000\right)\\ =\$294,000\end{array}$ (3)

b. Issued 9,000 shares of preferred stock at $20 each:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A) (5)		180,000
	Preferred stock (+SE) (4)			90,000
	Additional paid-in capital, preferred stock (+SE) (6)			90,000
	(To record the issuance of preferred stock)

Table (2)

• Cash is an assets account and it increased the value of asset by $180,000. Hence, debit the cash account for $180,000.
• Preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $90,000. Hence, credit the preferred stock for $90,000.
• Additional paid-in capital, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $90,000. Hence, credit the additional paid-in capital, preferred stock account for $90,000.

Working note:

Calculate the value of preferred stock

$\begin{array}{c}\text{Preferred stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=9,000 shares}\times \text{\$10}\\ \text{=\$90,000}\end{array}$ (4)

Calculate the total cash received

$\begin{array}{c}\text{Total amount of cash received =}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=9,000 shares}\times \text{\$20}\\ \text{=\$180,000}\end{array}$ (5)

Calculate the value of additional paid in capital, preferred stock

$\begin{array}{c}\text{Additional paid-in capital = }\left(\begin{array}{l}\text{Total cash received (5)}-\\ \text{Preferred stock value (4)}\end{array}\right)\\ =\left(\$180,000-\$90,000\right)\\ =\$90,000\end{array}$ (6)

c. Issued 2,500 common shares at $10 per share and issued 1,000 shares of preferred stock at $20 each:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A) (13)		45,000
	Preferred stock (+SE) (7)			10,000
	Common stock (+SE) (10)			12,500
	Additional paid-in capital, preferred stock (+SE) (9)			10,000
	Additional paid up capital, common stock(+SE) (12)			12,500
	(To record issuance of common stock and preferred stock)

Table (3)

• Cash is an assets account and it increased the value of asset by $45,000. Hence, debit the cash account for $45,000.
• Preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $10,000. Hence, credit the preferred stock for $10,000.
• Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $12,500, Hence, credit the common stock for $12,500.
• Additional paid-in capital, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $10,000. Hence, credit the additional paid-in capital, preferred stock account for $10,000.
• Additional paid up capital, common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $12,500. Hence, credit the additional paid up capital, common stock account for $12,500.

Working note:

Calculate the value of preferred stock

$\begin{array}{c}\text{Preferred stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=1,000 shares}\times \text{\$10}\\ \text{=\$10,000}\end{array}$ (7)

Calculate the cash received from preferred stock

$\begin{array}{c}\text{Cash received from preferred stock =}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=1,000 shares}\times \text{\$20}\\ \text{=\$20,000}\end{array}$ (8)

Calculate the value of additional paid in capital, preferred stock

$\begin{array}{c}\text{Additional paid-in capital = }\left(\begin{array}{l}\text{Cash received (8)}-\\ \text{Preferred stock value (7)}\end{array}\right)\\ =\left(\$20,000-\$10,000\right)\\ =\$10,000\end{array}$ (9)

Calculate the value of common stock

$\begin{array}{c}\text{Common stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=2,500 shares}\times \text{\$5}\\ \text{=\$12,500}\end{array}$ (10)

Calculate the cash received from common stock

$\begin{array}{c}\text{Cash received from common stock=}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=2,500 shares}\times \text{\$10}\\ \text{=\$25,000}\end{array}$ (11)

Calculate the value of additional paid in capital

$\begin{array}{c}\text{Additional paid-in capital = }\left(\begin{array}{l}\text{Total cash received (11)}-\\ \text{Common stock value (10)}\end{array}\right)\\ =\left(\$25,000-\$12,500\right)\\ =\$12,500\end{array}$ (12)

Calculate the value of total cash received from preferred stock and common stock

$\begin{array}{c}\text{Total cash received = }\left(\begin{array}{l}\text{Cash received from preferred stock (8) +}\\ \text{Cash received from common stock (11)}\end{array}\right)\\ =\$20,000+\$25,000\\ =\$45,000\end{array}$ (13)