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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

Work Place Products Inc., a wholesaler of office products, was organized on July 1 of the current year, with an authorization of 50,000 shares of preferred 2% stock, S40 par, and 750.000 shares of S7 par common stock. The following selected transactions were completed during the first year of operations:

July 1. Issued 400,000 shares of common stock at par for cash.
1. Issued 1,000 shares of common stock at par to an attorney in payment of legal fees for organizing the corporation.
Aug. 7. Issued 80.000 shares of common stock in exchange for land, buildings, and equipment with fair market prices of $250,000, $400,000, and $70,000, respectively.
Sept. 20. Issued 25,000 shares of preferred stock at $44 for cash.

Journalize 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 transactions.

Explanation

Record the journal entry for the issuance of common stock on July 1.

Date Account Titles and Explanation Debit ($) Credit ($)
July 1 Cash 2,800,000
   Common Stock (40,000 shares×$7) 2,800,000
(To record the issuance of common stock at par)
July 1 Organizational expense 7,000
   Common Stock (1,000 shares×$7) 7,000
(To record the issuance of common stock at par)

Table (1)

Description:

  • 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.
  • Organization expense is an expense which should be recognized, to record the legal payment made the attorney for organizing the corporation. Organization expense has been increased by $7,000. Therefore, debit Organization expense account with the amount of payment made.
  • 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.

Journalize the issuance of the stock in exchange of land, buildings, and equipment on August 7.

Date Account Titles and Explanation Debit ($) Credit ($)
August 7 Land 250,000
Buildings 400,000
Equipment 70,000
      Common stock (80,000 shares×$7) 560,000

      Paid-in capital in excess of par –

      Common stock (Balancing figure)

160,000
(To record issuance of shares in excess of par value in exchange of assets)

Table (2)

Description:

  • Land is an asset account

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