Chapter 11, Problem 2AP

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 30,000 common shares at $40 per share and issued 5,000 shares of preferred stock at $26 each:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A) (6)		1,330,000
	Common stock (+SE) (1)			1,200,000
	Preferred stock (+SE) (4)			25,000
	Additional paid-in capital, preferred stock (+SE) (5)			105,000
	(To record issuance of common stock and preferred stock)

Table (1)

• Cash is an assets account and it increased the value of asset by $1,330,000. Hence, debit the cash account for $1,330,000.
• Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $1,200,000, Hence, credit the common stock for $1,200,000.
• Preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $25,000. Hence, credit the preferred stock for $25,000.
• Additional paid-in capital, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $105,000. Hence, credit the additional paid-in capital, preferred stock account for $105,000.

Working note:

Calculate the value of common stock

$\begin{array}{c}\text{Common stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=30,000 shares}\times \text{\$40}\\ \text{=\$1,200,000}\end{array}$ (1)

Calculate the cash received from common stock

$\begin{array}{c}\text{Cash received from common stock=}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=30,000 shares}\times \text{\$40}\\ \text{=\$1,200,000}\end{array}$ (2)

Calculate the value of preferred stock

$\begin{array}{c}\text{Preferred stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=5,000 shares}\times \text{\$5}\\ \text{=\$25,000}\end{array}$ (3)

Calculate the cash received from preferred stock

$\begin{array}{c}\text{Cash received from preferred stock =}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=5,000 shares}\times \text{\$26}\\ \text{=\$130,000}\end{array}$ (4)

Calculate the value of additional paid in capital, preferred stock

$\begin{array}{c}\text{Additional paid-in capital = }\left(\begin{array}{l}\text{Cash received (4)}-\\ \text{Preferred stock value (3)}\end{array}\right)\\ =\left(\$130,000-\$25,000\right)\\ =\$105,000\end{array}$ (5)

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

$\begin{array}{c}\text{Total cash received = }\left(\begin{array}{l}\text{Cash received from common stock (2)+}\\ \text{Cash received from preferred stock (4) }\end{array}\right)\\ =\$1,200,000+\$130,000\\ =\$1,330,000\end{array}$ (6)

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

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A) (8)		64,000
	Preferred stock (+SE) (7)			10,000
	Additional paid-in capital, preferred stock (+SE) (9)			54,000
	(To record the issuance of preferred stock)

Table (2)

• Cash is an assets account and it increased the value of asset by $64,000. Hence, debit the cash account for $64,000.
• 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.
• Additional paid-in capital, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $54,000. Hence, credit the additional paid-in capital, preferred stock account for $54,000.

Working note:

Calculate the value of preferred stock

$\begin{array}{c}\text{Preferred stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=2,000 shares}\times \text{\$5}\\ \text{=\$10,000}\end{array}$ (7)

Calculate the total cash received

$\begin{array}{c}\text{Total amount of cash received =}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=2,000 shares}\times \text{\$32}\\ \text{=\$64,000}\end{array}$ (8)

Calculate the value of additional paid in capital, preferred stock

$\begin{array}{c}\text{Additional paid-in capital = }\left(\begin{array}{l}\text{Total cash received (8)}-\\ \text{Preferred stock value (7)}\end{array}\right)\\ =\left(\$64,000-\$10,000\right)\\ =\$54,000\end{array}$ (9)

c. Repurchase of 3,000 common shares at $38 per share:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Treasury stock (-SE) (10)		114,000
	Cash (-A)			114,000
	(To record the repurchase of common shares from investors)

Table (3)

• Treasury stock is the contra-equity. There is an increase in the contra-equity which decreases the value of stockholders’ equity. Hence, debit the treasury stock with $114,000.
• Cash is an asset. There is a decrease in the asset. Hence, credit cash account with $144,000

Working note:

Calculate the value of repurchase of shares

$\begin{array}{c}\text{Total amount of repurchase of shares=}\left(\text{ Number of share}\times \text{Cash per share}\right)\\ \text{=3,000 shares}\times \text{\$38}\\ \text{=\$114,000}\end{array}$ (10)