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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Stock transaction for corporate expansion

Pulsar Optics produces medical lasers for use in hospitals. The accounts and their balances appear in the ledger of Pulsar Optics on April 30 of the current year as follows:

Preferred 1% Stock, $120 par (300,000 shares authorized, 36,000 shares issued $ 4,320,000
Paid In Capital in Excess of Par—Preferred Stock 180,000
Common Stock, $15 par (2,000,000 shares authorized, 1,400,000 shares issued) 21.000,000
Paid In Capital in Excess of Par—Common Stock 3,500,000
Retained Earnings 78,000,000

At the annual stockholders’ meeting on August 5, the board of directors presented a plan for modernizing and expanding plant operations at a cost of approximately $9,000,000. The plan provided (a) that the corporation borrow $1,500.000. (b) that 20.000 shares of the unissued preferred stock be issued through an underwriter, and (c) that a building, valued at $4,150,000, and the land on which it is located, valued at $800,000, be acquired in accordance with preliminary negotiations by the issuance of 300.000 shares of common stock valued at $16.50 per share. The plan was approved by the stockholders and accomplished by the following transactions:

Oct. 9. Borrowed 51,500,000 from St. Peter City Bank, giving a 4% mortgage note.
17 . Issued 20,000 shares of preferred stock, receiving $126 per share in cash.
28 Issued 300.000 shares of common stock in exchange for land and a building, according to the plan.

Instructions

Journalize the entries to record the October transactions.

To determine

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.


Preferred stock:
The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

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.

Issue of common stock for non cash assets or services: Corporations often issue common stock for the services received from attorneys or consultants as compensation, or for the purchase of non cash assets such as land, buildings, or equipment.

To Journalize: The entries to record the October month transactions.

Explanation

Record the borrowed amount of $1,500,000 in exchange of mortgage note.

Date Account Titles and Explanation Debit ($) Credit ($)
October 9 Cash 1,500,000
      Mortgage note payable 1,500,000
(To record issuance of mortgage note for the amount of borrowings

Table (3)

Description:

  • Cash is an asset account, which is increased upon issuance of mortgage note. Hence, debit cash account with $1,500,000.
  • Mortgage payable is a liability account Common, which is increased upon issuance of mortgage note. Therefore, credit mortgage payable account with $1,500,000.

Record the issuance of preferred stock on October 17.

Date Account Titles and Explanation Debit ($) Credit ($)
October 17 Cash (20,000 shares×$126) 2,520,000
      Preferred Stock (20,000 shares×$120) 2,400,000

      Paid-in Capital in Excess of Par value –

      Preferred stock (Balancing figure)

120,000
(To record issuance of 20,000 shares in excess of par value)

Table (2)

Description:

  • Cash is an asset account, which is increased upon issuance of stock

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