Chapter 11, Problem 1PSB

1.

To determine

To explain: Transaction of the journal entries.

Explanation of Solution

a.

Sale of common stock of $1, each issued at $40 and the number of shares is 3,000.

b.

Common stock of $1 each issued at $40 to the promoters of the company for their efforts to set up the company. Total number of shares issue is 1,000.

c.

Assets and liabilities acquired through common stock issue of $800. Common stock has a par value $1 and issued at $50.

d.

Sale of common stock of $1, each issued at $50 and the number of shares is 1,200.

2.

To determine

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

Explanation of Solution

Given,
Shares issue in transaction ‘a.’ is 3,000.
Shares issue in transaction ‘b.’ is 1,000.
Shares issue in transaction ‘c.’ is 800.
Shares issue in transaction ‘d.’ is 1,200.

Formula for number of shares outstanding is:

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

Substitute 3,000 for shares issue in transaction a, 1,000 for shares issue in transaction b, 800 for shares issue in transaction c and 1,200 for shares issue in transaction d in the above formula,

$\begin{array}{c}\text{Number}\text{of}\text{Shares}\text{Outstanding}=3,000+1,000+800+1,200\\ =6,000\end{array}$

Hence, numbers of shares outstanding at the yearend are 6,000.

3.

To determine

To compute: Minimum legal capital.

Explanation of Solution

The number of outstanding share is 6,000 (calculated in part 2.).

Formula for minimum legal capital is:

$\text{Minimum}\text{Legal}\text{Capital}=\text{Number of shares outstanding}\times \text{Par value per share}$

Substitute 6,000 for number of outstanding share, and $1 for par value per share in the above formula,

$\begin{array}{c}\text{Minimum}\text{legal}\text{capital}=6,000\times \$1\\ =\$6,000\end{array}$

Hence, minimum legal capital is $6,000.

4.

To determine

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

Explanation of Solution

Given,
Paid in capital in transaction a is $117,000.
Paid in capital in transaction b is $39,000.
Paid in capital in transaction c is $39,200.
Paid in capital in transaction d is $58,800.

Formula for 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 $6,000 for minimum legal capital, $120,000 for paid in capital in transaction a, $40,000 for paid in capital in transaction b, $40,000 for paid in capital in transaction c and $60,000 for paid in capital in transaction d in the above formula,

$\begin{array}{c}\text{Total}\text{paid}\text{in}\text{capital}=\left(\begin{array}{l}\$120,000+\$40,000\\ +\$40,000+\$60,000\end{array}\right)\\ =\$260,000\end{array}$

Hence, total paid in capital at the yearend is $260,000.

5.

To determine

To compute: Book value of share.

Explanation of Solution

Stockholder’s equity is $283,200.
Preferred stock is $0.
Number of common shares is 6,000.

Formula for 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, $283,200 for stockholder’s equity, $0 for preferred stock and 6,000 for number of common shares in the above formula,

$\begin{array}{c}\text{Book}\text{value}\text{per}\text{share}=\frac{\$283,200-\$0}{6,000}\\ =\$47.2\end{array}$

Hence, the book value per share is $47.2.