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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

Selected stock transactions

Alpha Sounds Corp., an electric guitar retailer, was organized by Michele Kirby, Paul Glenn, and Gretchen Northway. The charter authorized 1,000,000 shares of common stock with a par of $1. The following transactions affecting stockholders’ equity were completed during the first year of operations:

  1. a. Issued 100,000 shares of stock at par to Paul Glenn for cash.
  2. b. Issued 3,000 shares of stock at par to Michele Kirby for promotional services provided in connection with the organization of the corporation and issued 45,000 shares of stock at par to Michele Kirby for cash.
  3. c. Purchased land and a building from Gretchen Northway in exchange for stock issued at par. The building is mortgaged for $180,000 for 20 years at 6%, and there is accrued interest of $5,200 on the mortgage note at the time of the purchase. It is agreed that the land is to be priced at $60,000 and the building at $225,000 and that Gretchen North way’s equity will be exchanged for stock at par. The corporation agreed to assume responsibility for paying the mortgage note and the accrued interest.

Journalize the entries to record the 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 transactions.

Explanation

a. Record the journal entry for the issuance of common stock.

Date Account Titles and Explanation Debit ($) Credit ($)
Cash (100,000 shares×$1) 100,000
   Common Stock                         100,000
(To record the issuance of common stock at par)

Table (1)

  • Cash is an asset account. The amount is increased, because cash is received upon stock issued. Therefore, debit Cash account with the amount of cash received.
  • Common Stock is a stockholders’ equity account and the amount is increased due to issuance of common stock. Therefore, credit Common Stock account with the value of Common stock.

b. Record the issuance of par value common stock to meet the organization expense.

Date Account Titles and Explanation Debit ($) Credit ($)
Organization Expense (3,000 shares×$1) 3,000
      Common Stock 3,000
(To record issuance of 3,000 shares of $1 par value per share to recognize the organization expense)

Table (2)

  • Organization expense is an expense which should be recognized, when the organizer of Corporation AP rendered promotional service. Organization expense has been increased by $3,000. Therefore, debit Organization expense account with the value of service received.
  • Common Stock is a stockholders’ equity account and the amount is increased due to issuance of common stock. Therefore, credit Common Stock account with the value of common stock.

Record the journal entry for the issuance of common stock

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