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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Next Level Morgan Corporation issues 500 “packages” of securities for $180 per package. Each package includes 10 shares of $1 par value common stock and 2 shares of $50 par value preferred stock. The separate market value of the common stock was $8 at the time of the sale and Morgan credits the Common Stock account for $5,000 and the Additional Paid-in Capital on Common Stock account for $29,615.38. What was the separate market value of the preferred stock on the date of the sale, and what journal entry would Morgan make to record this transaction?

To determine

Prepare the journal entry to record the packages issue of securities by Corporation B.

Explanation

Package issue of securities: When a corporation issues different kinds of securities in a package sale and allocates the proceeds among the securities based on the fair market value of respective securities. It includes common stock and preference stock.

Prepare the journal entry to record the packages issue of securities By Corporation B:

Account title and ExplanationPost Ref.

Debit

($)

Credit

($)

Cash (200packages×$80) $90,000 
    Common stock ($5×800shares)  $5,000
    Additional paid-in-capital (1)  $29,615.38
    Preferred  stock ($30×200shares)  $50,000
    Additional paid-in-capital (1)  $5,384.62
(To record the issuance of package securities)   

Table (1)

Explanation for the journal entry is as follows:

  • Cash is an asset account. Issuance of common stock for cash will increase the cash account. Thus, it is debited.
  • Common stock is component of the shareholders’ equity. Issuance of common stock wills increases the common stock account. Thus, it is credited.
  • Additional paid-in-capital is component of the shareholders’ equity. Issuance of common stock in excess of par value wills increases the Additional paid-in-capital account. Thus, it is credited.
  • Preferred stock is component of the shareholders’ equity. Issuance of common stock wills increases the common stock account. Thus, it is credited.
  • Additional paid-in-capital is component of the shareholders’ equity. Issuance of preferred stock in excess of par value wills increases the Additional paid-in-capital account. Thus, it is credited

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