Chapter 11, Problem 1PSA

1.

Summary Introduction

Journal Entries

Journal entries are recording of financial transactions which is related to the business in the book of accounts in such a way the debit equal to the credit.

To determine:Explanation of transactions from a. to d

Explanation of Solution

Following are the explanation of each journal entry:

1. Issued 10,000 ($250,000/25) shares of common stock for $300,000 cash.
2. Issued 5,000 ($125,000/25) shares of common stock in exchange for services rendered to organize the corporation valued at $150,000.
3. Issued 2,000 ($50,000/$25) shares of common stock and a note payable for $595,000 in exchange for $43,000 cash, account receivable valued at $15,000, and a building valued at 81,500.
4. Issued 3,000 ($75,000/25) shares of common stock for $120,000 cash.

2.

Summary Introduction

Outstanding shares

Outstanding shares are the company’s stock which are currently held by shareholders, investors, financial institutions and restricted shares owned by company’s officers and insiders.

To determine: Calculate the number of outstanding shares of common stock.

Answer to Problem 1PSA

Number of outstanding common share at the year-end is 20,000.

Explanation of Solution

Following are the calculation of number of outstanding shares.

Transaction	Face Value	Par Value	No. of outstanding share   $\left(\frac{\text{Face Value}}{\text{Par Value}}\right)$	No. of outstanding share
a.	$250,000	$25	$\left(\frac{\$250,000}{\$25}\right)$	10,000
b.	$125,000	$25	$\left(\frac{\$125,000}{\$25}\right)$	5,000
c.	$50,000	$25	$\left(\frac{\$50,000}{\$25}\right)$	2,000
d.	$75,000	$25	$\left(\frac{\$75,000}{\$25}\right)$	3,000
Total				20,000

Summary Introduction

Minimum Legal Capital

Minimum legal capital requirement is maintained to ensure sufficient asset base to satisfy the claim of creditors in the event of insolvency or financial instability,

To determine: Calculate the minimum legal capital at the year-end based on par value.

Answer to Problem 1PSA

Minimum legal capital at the year-end based on par value is $500,000

Explanation of Solution

Calculation of Minimum legal capital at the year-end based on par value:

$\text{Minimum legal capital = Outstanding Shares }\times \text{ Par value per share}$

  $=20,000\times \$25$

  $=\$500,000$

Summary Introduction

Paid-in Capital

Paid-in capital are refer as a contribution which are made by investors through purchase of stock at par in the organization.

To determine: Calculate the total paid-in capital at the year-end.

Answer to Problem 1PSA

Total paid-in capital at the year-end is $650,000.

Explanation of Solution

Transaction	No. ofshare	Par Value	Face Value	Premium
a.	10,000	$25	$250,000	50,000
b.	5,000	$25	$125,000	25,000
c.	2,000	$25	$50,000	30,000
d.	3,000	$25	$75,000	45,000
Total	20,000		$500,000	150,000

Therefore,

Particulars	Amount ($)
Face value of shares	$500,000
Premium on shares	$150,000
Total Paid-in Capital	$650,000

Summary Introduction

Paid-in Capital

Paid-in capital are refer as a contribution which are made by investors through purchase of stock at par in the organization.

To determine:Calculate book value of common stock per share if retained earnings plus paid-in capital is $695,000.

Answer to Problem 1PSA

Book-value per share of common stock is equal to $34.75

Explanation of Solution

Calculation of book-value per share:

Particulars	Amount $
Total paid-in capital plus retained earnings	695,000
Number of shares	20,000
Book value per share   $\left(\frac{\text{Total paid-in capital plus retained earnings}}{\text{Number of shares}}\right)$	34.75