Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 3P
To determine

Prepare the journal entries for given transaction during the year 2014.

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 66,000 common shares at $9 per share:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash (+A) (2) 594,000 
 Common stock (+SE) (1)  330,000
 Contributed capital in excess of par, common stock (+SE) (3)  264,000
 (To record the issuance of common stock)   

Table (1)

  • Cash is an assets account and it increased the value of asset by $594,000. Hence, debit the cash account for $594,000.
  • Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $330,000. Hence, credit the common stock for $330,000.
  • Contributed capital in excess of par is a component of stockholder’s equity and it increased the value of stockholder’s equity by $264,000. Hence, credit the Contributed capital in excess of par for $264,000.

Working note:

Calculate the value of common stock

Common stock =( Number of shares issued ×Par value per share)=66,000 shares×$5=$330,000 (1)

Calculate the total cash received

Total amount of cash received =( Number of share×Issue price per share)=66,000 shares×$9=$594,000 (2)

Calculate the value of Contributed capital in excess of par

Contributed capital in excess of par = (Total cash received (2)Common stock value (1))=($594,000$330,000)=$294,000 (3)

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

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash (+A) (5) 180,000 
 Preferred stock (+SE) (4)  90,000
 Contributed capital in excess of par, preferred stock (+SE) (6)  90,000
 (To record the issuance of preferred stock)   

Table (2)

  • Cash is an assets account and it increased the value of asset by $180,000. Hence, debit the cash account for $180,000.
  • Preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $90,000. Hence, credit the preferred stock for $90,000.
  • Contributed capital in excess of par, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $90,000. Hence, credit the Contributed capital in excess of par, preferred stock account for $90,000.

Working note:

Calculate the value of preferred stock

Preferred stock =( Number of share×Par value per share)=9,000 shares×$10=$90,000 (4)

Calculate the total cash received

Total amount of cash received =( Number of share×Cash received per share)=9,000 shares×$20=$180,000 (5)

Calculate the value of Contributed capital in excess of par, preferred stock

Contributed capital in excess of par= (Total cash received (5)Preferred stock value (4))=($180,000$90,000)=$90,000 (6)

c. Issued 2,500 common shares at $10 per share and issued 1,000 shares of preferred stock at $20 each:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash (+A) (13) 45,000 
 Preferred stock (+SE) (7)  10,000
 Common stock (+SE) (10)  12,500
 Contributed capital in excess of par, preferred stock (+SE) (9)  10,000
 Contributed capital in excess of par, common stock(+SE) (12)  12,500
 (To record issuance of common stock and preferred stock)   

Table (3)

  • Cash is an assets account and it increased the value of asset by $45,000. Hence, debit the cash account for $45,000.
  • 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.
  • Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $12,500, Hence, credit the common stock for $12,500.
  • Contributed capital in excess of par, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $10,000. Hence, credit the Contributed capital in excess of par, preferred stock account for $10,000.
  • Contributed capital in excess of par, common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $12,500. Hence, credit the Contributed capital in excess of par, common stock account for $12,500.

Working note:

Calculate the value of preferred stock

Preferred stock =( Number of share×Par value per share)=1,000 shares×$10=$10,000 (7)

Calculate the cash received from preferred stock

Cash received from preferred stock =( Number of share×Cash per share)=1,000 shares×$20=$20,000 (8)

Calculate the value of Contributed capital in excess of par, preferred stock

Contributed capital in excess of par = (Cash received (8)Preferred stock value (7))=($20,000$10,000)=$10,000 (9)

Calculate the value of common stock

Common stock =( Number of share×Par value per share)=2,500 shares×$5=$12,500 (10)

Calculate the cash received from common stock

Cash received from common stock=( Number of share×Cash per share)=2,500 shares×$10=$25,000 (11)

Calculate the value of Contributed capital in excess of par

Contributed capital in excess of par= (Total cash received (11)Common stock value (10))=($25,000$12,500)=$12,500 (12)

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

Total cash received = (Cash received from preferred stock (8) +Cash received from common stock (11))=$20,000+$25,000=$45,000 (13)

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Chapter 11 Solutions

Financial Accounting, 8th Edition

Ch. 11 - What are the two basic requirements to support the...Ch. 11 - Prob. 12QCh. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Prob. 16QCh. 11 - Prob. 1MCQCh. 11 - Prob. 2MCQCh. 11 - Prob. 3MCQCh. 11 - Prob. 4MCQCh. 11 - Prob. 5MCQCh. 11 - Prob. 6MCQCh. 11 - Prob. 7MCQCh. 11 - Which statement regarding dividends is false? a....Ch. 11 - Prob. 9MCQCh. 11 - Prob. 10MCQCh. 11 - Prob. 1MECh. 11 - Prob. 2MECh. 11 - Prob. 3MECh. 11 - Prob. 4MECh. 11 - Determining the Effects of Treasury Stock...Ch. 11 - Determining the Amount of a Dividend Cole Company...Ch. 11 - Prob. 7MECh. 11 - Prob. 8MECh. 11 - Prob. 9MECh. 11 - Prob. 10MECh. 11 - Prob. 1ECh. 11 - Prob. 2ECh. 11 - Prob. 3ECh. 11 - Prob. 4ECh. 11 - Prob. 5ECh. 11 - Prob. 6ECh. 11 - Prob. 7ECh. 11 - Prob. 8ECh. 11 - Prob. 9ECh. 11 - Prob. 10ECh. 11 - Prob. 11ECh. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 14ECh. 11 - Prob. 15ECh. 11 - Prob. 16ECh. 11 - Prob. 17ECh. 11 - Prob. 18ECh. 11 - Prob. 19ECh. 11 - Prob. 20ECh. 11 - Prob. 21ECh. 11 - Prob. 22ECh. 11 - Prob. 23ECh. 11 - Prob. 24ECh. 11 - Prob. 25ECh. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Prob. 12PCh. 11 - Prob. 1APCh. 11 - Prob. 2APCh. 11 - Prob. 3APCh. 11 - Prob. 4APCh. 11 - Prob. 1ACOMPCh. 11 - Prob. 1BCOMPCh. 11 - Prob. 1CCOMPCh. 11 - Prob. 1DCOMPCh. 11 - Prob. 1CPCh. 11 - Prob. 2CPCh. 11 - Prob. 3CPCh. 11 - Prob. 4CPCh. 11 - Prob. 5CPCh. 11 - Prob. 6CPCh. 11 - Prob. 1CC
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