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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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Various Journal Entries Lodi Company is authorized to issue 100,000 shares of no-par, $6 stated-value common stock and 10,000 shares of 9%, $100 par preferred stock. It enters into the following transactions:

  1. 1. Accepts a subscription contract to 7,000 shares of common stock at $42 per share and receives a 30% down payment.
  2. 2. Collects the remaining balance of the subscription contract and issues the common stock.
  3. 3. Acquires a building by paying $3,000 cash and issuing 3,000 shares of common stock and 900 shares of preferred stock. Common stock is currently selling at $46 per share; preferred stock has no current market value. The building is appraised at $225,000.
  4. 4. Sells 1,000 shares of common stock at $47 per share.
  5. 5. Sells 900 shares of preferred stock at $112 per share.
  6. 6. Declares a three-for-one stock split on the common stock, reducing the stated value to $2.00 per share.

Required:

Prepare memorandum and journal entries to record the preceding transactions.

To determine

Prepare a memorandum and journal entries to record the given transactions.

Explanation

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.

Prepare a journal entry to record the acceptance of subscription contract and receives the 30% down payment:

Account Titles and ExplanationPost Ref.Debit ($)Credit ($)
Cash (0.30×7,000×$42) 88,200 
Subscriptions Receivable 205,800 
    Common Stock Subscribed ($6×7,000shares)  42,000
    Additional Paid-in Capital on Common Stock     (($42×7,000)$42,000)  252,000
(To record subscriptions accepted for common stock)   

Table (1)

  • Cash is an asset account. The amount is increased because down payment is received for the subscriptions of common stock; therefore, debit Cash account with $88,200.
  • Subscriptions Receivable is an asset account. The amount is increased because the balance amount on common stock issued is to be received. Therefore, debit Subscriptions Receivable account with $205,800.
  • Common Stock Subscribed is a stockholders’ equity account and the amount has increased because common stock subscriptions are accepted. Therefore, credit Common Stock Subscribed account with $42,000.
  • Additional Paid-in Capital on Common Stock is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Additional Paid-in Capital on Common Stock account with $252,000.

Prepare journal entries to record the receipt of remaining balance of subscription contract:

Account Titles and ExplanationPost Ref.Debit ($)Credit ($)
Cash 205,800 
    Subscriptions Receivable  205,800
(To record receipt of subscriptions receivable)   

Table (2)

  • Cash is an asset account. The amount is increased because subscriptions receivable on common stock is collected; therefore, debit Cash account with $205,800.
  • Subscriptions Receivable is an asset account. The amount is decreased because the balance amount on common stock issued which was to be received is received. Therefore, credit Subscriptions Receivable account with $205,800.
Account Titles and ExplanationPost Ref.Debit ($)Credit ($)
Common Stock Subscribed 42,000 
    Common Stock  42,000
(To record fully paid common stock subscriptions as common stock)   

Table (3)

  • Common Stock Subscribed is a stockholders’ equity account and the amount has decreased because common stock subscriptions are fully paid and issued as common shares. Therefore, debit Common Stock Subscribed account with $42,000.
  • Common Stock is a stockholders’ equity account and the amount has increased because common stock subscriptions are fully paid and issued as common shares. Therefore, credit Common Stock account with $42,000.

Prepare a journal entry to record the issuance of common stock and preferred stock in exchange of building:

Account Titles and ExplanationPost Ref.Debit ($)Credit ($)
Building 231,000 
    Common Stock ($6×3,000)  18,000
    Additional Paid-in Capital on Common Stock     (($46$6)×3,000)    120,000
    Preferred Stock, $100 par  90,000
    Cash  3,000
(To record issue of common stock and preferred stock for acquisition of building)   

Table (4)

  • Building is an asset account

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