Chapter 11, Problem 3E

To determine

Journal Entries:

It is a book of original entry. It records and summarizes financial transaction of an entity in chronological manner, generally according to dual aspect of accounting.

Accounting rules regarding journal entries:

• Balance increase when: Assets, losses and expenses get debited and liabilities, gains, and revenue get credited.
• Balance decrease when: Assets, losses and expenses get credited and liabilities, gains, and revenue get debited.

Stated Value:

It is the value of a share assign by the management of the company when its charter is silent about the face value of the share. It is assigned for accounting purpose.

To prepare: Journal entry.

Explanation of Solution

1.

4,000 shares issued for $35,000n with $5 par value:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cash		35,000
	Common Stock			20,000
	Paid in capital in excess of par value, common stock			15,000
	(Being shares issued at above face value )

• Cash is an asset. Since, cash is received, it increases asset. Hence debit Cash account
• Common stock is equity. Since, shares is issued, it increases equity. Hence, credit Common Stock account.
• Paid in capital in excess of par value, common stock is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit Paid in capital in excess of par value, common stock.

Working Notes:

Calculation for common stock:

$\begin{array}{c}\text{Common}\text{Stock}=\text{Number}\text{of}\text{Shares}\times \text{Face}\text{value}\\ =4,000\times \$5\\ =\$20,000\end{array}$

Calculation For paid in excess of par value:

$\begin{array}{c}\text{Paid}\text{in}\text{excess}\text{of}\text{par}\text{value}=\text{Total}\text{Cash}-\text{Common}\text{Stock}\\ =\$35,000-\$20,000\\ =\$15,000\end{array}$

2.

2,000 shares for employees effort has been issued worth $40,000 for $1 stated value:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Retained Earnings		40,000
	Common Stock			2,000
	Paid in capital in excess of par value, common stock			38,000
	(Being shares issued at above face value )

• Retained earnings are a part of stockholder’s equity. Since, shares is issued from it, it reduces retained earnings. Hence, debit Retained Earnings account.
• Common stock is equity. Since, shares is issued, it increases equity. Hence, credit Common Stock account.
• Paid in capital in excess of par value, common stock is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit Paid in capital in excess of par value, common stock.

Working Notes:

Calculation for common stock:

$\begin{array}{c}\text{Common}\text{Stock}=\text{Number}\text{of}\text{Shares}\times \text{Face}\text{value}\\ =2,000\times \$1\\ =\$2,000\end{array}$

Calculation For paid in excess of par value:

$\begin{array}{c}\text{Paid}\text{in}\text{excess}\text{of}\text{par}\text{value}=\text{Total}\text{Retaine}\text{d}\text{Earnings}-\text{Common}\text{Stock}\\ =\$40,000-\$2,000\\ =\$38,000\end{array}$

3.

2,000 shares for employees effort has been issued worth $40,000:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Retained Earnings		40,000
	Common Stock			40,000
	(Being shares issued at above face value )

• Retained earnings are a part of stockholder’s equity. Since, shares is issued from it, it reduces retained earnings. Hence, debit retained earnings account.
• Common stock is equity. Since, shares is issued, it increases equity. Hence, credit common stock account.

4.

1,000 shares issued for $60,000n with $50 par value:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cash		60,000
	Preferred Stock			50,000
	Paid in capital in excess of par value, Preferred stock			10,000
	(Being shares issued at above face value )

• Cash is an asset. Since, cash is received, it increases asset. Hence debit Cash account
• Preferred Stock is equity. Since, shares is issued, it increases equity. Hence, credit preferred stock account.
• Paid in capital in excess of par value, preferred stock is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit paid in capital in excess of par value, preferred stock.

Working Notes:

Calculation for common stock:

$\begin{array}{c}\text{Preferred}\text{Stock}=\text{Number}\text{of}\text{Shares}\times \text{Face}\text{value}\\ =1,000\times \$50\\ =\$50,000\end{array}$

Calculation For paid in excess of par value:

$\begin{array}{c}\text{Paid}\text{in}\text{excess}\text{of}\text{par}\text{value}=\text{Total}\text{Cash}-\text{Common}\text{Stock}\\ =\$60,000-\$50,000\\ =\$10,000\end{array}$