Chapter 11, Problem 1PSA

1.

To determine

To explain: Transactions in the given journal entries.

Explanation of Solution

a.

Sale of common stock of $25, each issued at $30 and the number of shares is 10,000.

b.

Common stock of $25 each issued at $30 to the promoters of the company for their efforts to set up the company. Total number of shares issue is 6,000.

c.

Assets and liabilities acquired through common stock issue of $50,000. Common stock has a par value $25 and issued at $40.

d.

Sale of common stock of $25, each issued at $40 and the number of shares is 3,000.

2.

To determine

To compute: Number of common shares outstanding at the year end.

Explanation of Solution

Given,
Shares issue in transaction a is 10,000.
Shares issue in transaction b is 5,000.
Shares issue in transaction c is 2,000.
Shares issue in transaction d is 3,000.

Formula to calculate number of shares outstanding is,

$\text{Number}\text{of}\text{Shares}\text{Outstanding}=\left(\begin{array}{l}\text{Shares}\text{Issued}\text{in}\text{transaction}\text{a}\\ +\text{Shares}\text{Issued}\text{in}\text{transaction}\text{b}\\ +\text{Shares}\text{Issued}\text{in}\text{transaction}\text{c}\\ +\text{Shares}\text{Issued}\text{in}\text{transaction}\text{d}\end{array}\right)$

Substitute 10,000 for shares issue in transaction a, 5,000 for shares issue in transaction b, 2,000 for shares issue in transaction c and 3,000 for shares issue in transaction d.

$\begin{array}{c}\text{Number}\text{of}\text{Shares}\text{Outstanding}=10,000+5,000+2,000+3,000\\ =20,000\end{array}$

Hence, numbers of shares outstanding at the year end are 20,000.

3.

To determine

To compute: Minimum legal capital.

Explanation of Solution

Given,
Common stock in transaction a is $250,000.
Common stock in transaction b is $125,000.
Common stock in transaction c is $50,000.
Common stock in transaction d is $75,000.

Formula to calculate minimum legal capital is,

$\text{Minimum}\text{Legal}\text{Capital}=\left(\begin{array}{l}\text{Common Stock}\text{in}\text{transaction}\text{a}\\ +\text{Common Stock}\text{in}\text{transaction}\text{b}\\ +\text{Common Stock}\text{in}\text{transaction}\text{c}\\ +\text{Common Stock}\text{in}\text{transaction}\text{d}\end{array}\right)$

Substitute $250,000 for common stock in transaction a, $125,000 for common stock in transaction b, $50,000 for common stock in transaction c and $75,000 for common stock in transaction d,

$\begin{array}{c}\text{Number}\text{of}\text{Shares}\text{Outstanding}=\$250,000+\$125,000+\$50,000+\$75,000\\ =\$500,000\end{array}$

Hence, minimum share capital at the year end is $500,000.

4.

To determine

To compute: Total paid in capital at the year end.

Explanation of Solution

Given,
Paid in capital in transaction a is $250,000.
Paid in capital in transaction b is $125,000.
Paid in capital in transaction c is $50,000.
Paid in capital in transaction d is $75,000.

Formula to calculate paid in capital is,

$\text{Total}\text{Paid}\text{in}\text{Capital}=\left(\begin{array}{l}\text{Minimum}\text{Legal}\text{Capital}\\ +\text{Paid}\text{in}\text{capital}\text{in}\text{transaction}\text{a}\\ +\text{Paid}\text{in}\text{capital}\text{in}\text{transaction}\text{b}\\ +\text{Paid}\text{in}\text{capital}\text{in}\text{transaction}\text{c}\\ +\text{Paid}\text{in}\text{capital}\text{in}\text{transaction}\text{d}\end{array}\right)$

Substitute $500,000 for minimum legal capital, $50,000 for paid in capital in transaction a, $25,000 for paid in capital in transaction b, $30,000 for paid in capital in transaction c and $45,000 for paid in capital in transaction d.

$\begin{array}{c}\text{Number}\text{of}\text{Shares}\text{Outstanding}=\left(\begin{array}{l}\$500,000+\$50,000+\$25,000\\ +\$30,000+\$45,000\end{array}\right)\\ =\$650,000\end{array}$

Hence, total paid in capital at the year end is $650,000.

5.

To determine

To compute: Book value of share.

Explanation of Solution

Given,
Stockholder’s equity is $695,000.
Preferred stock is $0.
Number of common shares is 20,000.

Formula to calculate book value per share is,

$\text{Book}\text{Value}\text{per}\text{Share}=\frac{\text{Stockholders'}\text{Equity}-\text{Preferred}\text{Stock}}{\text{Number}\text{of}\text{Common}\text{Shares}}$

Substitute $695,000 for stockholder’s equity, $0 for preferred stock and 20,000 for number of common shares.

$\begin{array}{c}\text{Book}\text{value}\text{per}\text{share}=\frac{\$695,000-\$0}{20,000}\\ =\$34.75\end{array}$

Hence, book value per share is $34.75.