Chapter 15, Problem 7P

Issuances of Stock Cada Corporation is authorized to issue 10,000 shares of $100 par, convertible, callable preferred stock and 80,000 shares of no-par, no-stated value common stock. There are currently 7,000 shares of preferred and 30,000 shares of common stock outstanding. The following are several alternative transactions:

1. 1. Purchased land by issuing 640 shares of preferred stock and 1,000 shares of common stock. Preferred and common are currently selling at $113 and $36 per share, respectively, No reliable appraisal of the land is available.
2. 2. Same as Transaction 1, except that land is appraised at $104,000, and the preferred stock has no current market value.
3. 3. Issued, for $99,000 cash, a combination of 400 shares of preferred stock and bonds payable with a face value of $50,000. Currently, the preferred stock is selling for $120 per share and the bonds at 104.
4. 4. Same as Transaction 3, except that the bonds do not have a current market value.
5. 5. Same as Transaction 3, except that the preferred stock does not have a current market value.
6. 6. Preferred shareholders (who had originally paid the corporation $110 per share for their stock) convert 6,500 preferred shares into 19,500 shares of common stock. The current market prices of the preferred stock and the common stock are $120 and $41 per share, respectively.
7. 7. The corporation calls the 7,000 shares of preferred stock (originally issued at $110 per share) at $123 per share. Common stock is currently selling for $42 per share. Shareholders elect not to convert into common stock.
8. 8. Same as Transaction 7, except that shareholders owning 2,000 shares of preferred stock elect to convert each share into 3 shares of common stock The remaining 5,000 preferred shares are retired.

Required:

Next Level Prepare the journal entry necessary to record each transaction. Below each entry, explain your reason for the values used.

To determine

Prepare the necessary journal entries to record the given transactions and give the reasons for the values used in entries.

Explanation of Solution

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

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: Preferred stock is the cash raised by the company by issuing preferred shares. This investment fetches a preferential right for dividend for the preferred stockholders over the common stockholders.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Prepare the necessary journal entries to record the given transactions and give the reasons for the values used in entries:

1. Purchased land by issuing 640 shares of preferred and 1,000 shares of common stock:

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Land		$108,320
	Common stock, no par $\left(1,000\times \$36\right)$			$36,000
	Preferred stock, $100 par			$64,000
	Additional paid in capital on preferred stock $\left(640\times \$13\right)$			$8,320
	(To record the purchase of land by issuing shares)

Table (1)

Reason for the amounts used: As the values of the preferred stock and common stock are available, thus, their aggregated value is allocated to land.

2. Purchased land by issuing 640 shares of preferred and 1,000 shares of common stock:

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Land		$104,000
	Common stock, no par $\left(1,000\times \$36\right)$			$36,000
	Preferred stock, $100 par			$64,000
	Additional paid in capital on preferred stock $\left((\$104,000-36,000)-\$64,000\right)$			$4,000
	(To record the purchase of land by issuing shares)

Table (2)

Reason for the amounts used: As the values of the common stock and land are available, thus, common stock value is deducted from the land value to assign the value to preferred stock.

3. Issue of preferred stock and bonds payable for $99,000.

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Cash		$99,000
	Premium on bonds payable			$1,480
	Bonds Payable			50,000
	Preferred stock, $100 par			$40,000
	Additional paid in capital on preferred stock			$7,520
	(To record the package sale of preferred stock and bonds payable)

Table (3)

Working note 1: calculate the allocation of proceedings.

Particulars	Calculations	Amount ($)
Preferred stock	$\frac{\left(\$120\times 400\text{shares}\right)}{\left[\left(\$120\times 400\text{shares}\right)+\left(1.04\times \$50,000\right)\right]}\times \$99,000$	$47,520
Bonds	$\frac{\left(1.04\times \$50,000\right)}{\left[\left(\$120\times 400\text{shares}\right)+\left(1.04\times \$50,000\right)\right]}\times \$99,000$	$51,480
		$99,000

Table (4)

Reason for the amounts used: As the cash was received for the sale of package of securities, the value assigned to both the securities is based on the relative fair value of each security.

4. Issue of preferred stock and bonds payable for $99,000. Bonds don’t have current market value.

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Cash		$99,000
	Premium on bonds payable			$1,000
	Bonds Payable			50,000
	Preferred stock, $100 par			$40,000
	Additional paid in capital on preferred stock  $\left(400\times \$20\right)$			$8,000
	(To record the package sale of preferred stock and bonds payable)

Table (5)

Reason for the amounts used: As the values of cash and preferred stock are available, the values of the preferred stock are deducted from the cash to compute the value allocated to bonds.

5. Issue of preferred stock and bonds payable for $99,000. Preferred stock doesn’t have current market value.

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Cash		$99,000
	Premium on bonds payable $\left((1.04\times 50,000)-\$50,000\right)$			$2,000
	Bonds Payable			50,000
	Preferred stock, $100 par			$40,000
	Additional paid in capital on preferred stock			$7,000
	(To record the package sale of preferred stock and bonds payable)

Table (6)

Reason for the amounts used: As the values of cash and bonds are available, the values of the bonds are deducted from the cash to compute the value allocated to preferred stock.

6. Preferred stocks are converted into common stock.

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Preferred stock		$650,000
	Additional paid in capital on preferred stock		$65,000
	Common stock, no par			$715,000
	(To record the conversion of preferred stock into common stock)

Table (7)

Reasoning for the amounts used: preferred stock’s book value is allotted to the common stock value. The reason is it will not result into record the gain or loss on the transaction involved in its own capital stock.

7. Corporation calls the preferred stock.

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Preferred stock		$700,000
	Additional paid in capital on preferred stock $\left(\$10\times 7,000\right)$		$70,000
	Retained earnings $\left[\left(\$123-\$110\right)\times 7,000\right]$		$91,000
	Cash $\left(\$123\times \$7,000\right)$			$861,000
	(To record the conversion of preferred stock into common stock)

Table (8)

Reasoning for the amounts used: The difference between the cash proceedings and the original contributed capital on the preferred stock is treated as a decrease in the retained earnings thus; it will not result in a recorded gain or loss on a transaction involving the corporation’s own contributed capital.

8. Corporation calls the preferred stock and shareholders elected to convert one preferred stock into 3 common stocks.

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Preferred stock		$200,000
	Additional paid in capital on preferred stock $\left(\$10\times 2,000\right)$		$20,000
	Common stock, no par			$220,000
	(To record the conversion of preferred stock into common stock)

Table (9)

Reasoning for the amounts used: preferred stock’s book value is allotted to the common stock value. The reason is it will not result into record the gain or loss on the transaction involved in its own capital stock.

Date	Accounts title and Explanation	Post ref.	Debit ($)	Credit ($)
	Preferred stock, $100 par		$500,000
	Additional paid in capital on preferred stock $\left(\$10\times 5,000\right)$		$50,000
	Retained earnings $\left[\left(\$123-\$110\right)\times 5,000\right]$		$65,000
	Cash  $\left(\$123\times \$5,000\right)$			$615,000
	(To record the conversion of preferred stock into common stock)

Table (10)

Reasoning for the amounts used: The difference between the cash proceedings and the original contributed capital on the preferred stock is treated as a decrease in the retained earnings thus; it will not result in a recorded gain or loss on a transaction involving the corporation’s own contributed capital.