Financial Accounting
Financial Accounting
10th Edition
ISBN: 9781260481563
Author: Libby, Robert
Publisher: MCGRAW-HILL HIGHER EDUCATION
Question
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Chapter 11, Problem 2AP
To determine

Prepare the journal entries for given transaction.

Expert Solution & Answer
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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:

DateAccounts title and explanationRef.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

Common stock =( Number of share×Par value per share)=30,000 shares×$40=$1,200,000 (1)

Calculate the cash received from common stock

Cash received from common stock=( Number of share×Cash per share)=30,000 shares×$40=$1,200,000 (2)

Calculate the value of preferred stock

Preferred stock =( Number of share×Par value per share)=5,000 shares×$5=$25,000 (3)

Calculate the cash received from preferred stock

Cash received from preferred stock =( Number of share×Cash per share)=5,000 shares×$26=$130,000 (4)

Calculate the value of additional paid in capital, preferred stock

Additional paid-in capital = (Cash received (4)Preferred stock value (3))=($130,000$25,000)=$105,000 (5)

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

Total cash received = (Cash received from common stock (2)+Cash received from preferred stock (4) )=$1,200,000+$130,000=$1,330,000 (6)

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

DateAccounts title and explanationRef.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

Preferred stock =( Number of share×Par value per share)=2,000 shares×$5=$10,000 (7)

Calculate the total cash received

Total amount of cash received =( Number of share×Cash per share)=2,000 shares×$32=$64,000 (8)

Calculate the value of additional paid in capital, preferred stock

Additional paid-in capital = (Total cash received (8)Preferred stock value (7))=($64,000$10,000)=$54,000 (9)

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

DateAccounts title and explanationRef.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

Total amount of repurchase of shares=( Number of share×Cash per share)=3,000 shares×$38=$114,000 (10)

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Chapter 11 Solutions

Financial Accounting

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