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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Stock Rights with Preferred Stock Nelson Corporation issues 6,000 shares of $100 par preferred stock at a price of $112 per share. A stock warrant is attached to each share of preferred stock that enables the holder to purchase one share of $10 par common stock for $25. Immediately after issuance, the preferred stock begins selling ex rights for $110 per share. The warrants (which expire in 30 days) also begin trading for $4 per warrant.

Required:

  1. 1. Prepare the journal entry to record the sale of the preferred stock.
  2. 2. Prepare the journal entry to record the issuance of 5,000 shares of common stock in exchange for 5,000 warrants and $25 per share.
  3. 3. Prepare the journal entry to record the expiration of 1,000 warrants.

1.

To determine

Prepare the journal entry to record the sale of preferred stock.

Explanation

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.

Prepare a journal entry to record the issuance of the preferred stock:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
1.Cash ($112×6,000share) $672,000 
    Preferred Stock, 100 par ($100×6,000share)  $600,000
     Additional Paid-in Capital on Preferred stock  $48,421
     Paid in capital on stock warrants  $23,579
 (To record issuance of preferred stock)   

Table (1)

  • Cash is an asset account. The amount has increased because cash is raised by issuing shares; therefore, debit Cash account.
  • Preferred Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Preferred Stock account.
  • Additional Paid-in Capital on Preferred Stock is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Additional Paid-in Capital on Preferred Stock account

2.

To determine

Prepare the journal entries to record the issuance of common stock in exchange for share warrants.

3.

To determine

Prepare the journal entry to record the expiration of share warrants.

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