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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

Issuing stock

Willow Creek Nursery, with an authorization of 75,000 shares of preferred stock and 200,000 shares of common stock, completed several transactions involving its stock on October 1, the first day of operations. The trial balance at the close of the day follows:

Cash..................................................... 3,780.000  
Land..................................................... 840,000  
Buildings................................................. 2,380,000  
Preferred 1% Stock, $80 par...............................   2,800,000
Paid In Capital in Excess of Par—Preferred Stock...........   420,000
Common Stock. $30 par..................................   3,600,000
Paid In Capital in Excess of Par—Common Stock...........   180,000
  7,000,000 7,000,000

All shares within each class of stock were sold at the same price. The preferred stock was issued in exchange for the land and buildings.

Journalize the two entries to record the transactions summarized in the trial balance.

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.

To Journalize: The two entries to record the transactions summarized in the trial balance.

Explanation

Journalize the two entries to record the transactions summarized in the trial balance.

Date Account Titles and Explanation Debit ($) Credit ($)
October 1 Cash ($3,600,000+$180,000) 3,780,000
      Common Stock   (120,000 shares ×$30) 3,600,000

      Paid-in Capital in Excess of Par value –

      Common stock

180,000
(To record the issuance of 120,000 shares in excess of par value)

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 ($3,600,000$30) 120,000 shares of common stock. Therefore, credit Common Stock account with the value of common stock.
  • Paid-in Capital in Excess of Par Value is a stockholders’ equity account and the amount is increased due to increase in capital

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