Chapter 15, Problem 9P

Comprehensive Young Corporation has been operating successfully for several years. It is authorized to issue 24,000 shares of no-par common stock and 6,000 shares of 8%, $100 par preferred stock. The Contributed Capital section of its January 1, 2019, balance sheet is as follows:

Part a. A shareholder has raised the following questions:

1. 1. What is the legal capital of the corporation?
2. 2. At what average price per share has the preferred stock been issued?
3. 3. How many shares of common stock have been issued (the common stock has been issued at an average price of $23 per share)?

Part b. The company engaged in the following transactions in 2019:

Required:

1. 1. Answer the questions in Part a.
2. 2. Prepare journal entries to record the transactions in Part b.
3. 3. Prepare the Contributed Capital section of Young’s December 31, 2016, balance sheet.

To determine

Identify the legal capital of the corporation.

Explanation of Solution

Legal capital: It is an amount of capital which is restricted for the purpose of dividends and other distributions.

The legal capital of corporation is $374,000$\left(\$190,000+\$184,000\right)$.

To determine

Identify the average issue price per share of the preferred stock

Explanation of Solution

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.

The average issue price per share of the preferred stock is $108$\left[\frac{\left(\text{\$190,000}+\text{\$15,200}\right)}{\text{1,900 shares}}\right]$.

To determine

Identify the number of common stock have been issued.

Explanation of Solution

Common stock: The amount invested in the corporation by an investor to receive a return or share of profit from the profits earned by the corporation is known as common stock.

Compute number of common shares issued.

$\begin{array}{c}\begin{array}{l}\text{Number of common }\\ \text{shares issued}\end{array}\}\text{ = }\frac{\text{Common stock capital}}{\text{Average issuance price of common shares}}\\ \text{=}\frac{\text{\$184,000}}{\text{\$23}}\\ \text{= 8,000 shares}\end{array}$

Therefore, the numbers of shares issued are 8,000 shares.

To determine

Prepare the journal entries to record the given transactions in part b.

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.

Prepare the journal entries to record the given transactions in part b:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
March 2	Cash $\left(\$122\times 350\right)$		42,700
	Preferred Stock $\left(\$100\times 350\right)$			35,000
	Additional Paid-in Capital on Preferred Stock			7,700
	(To record issuance of preferred stock)
April 5	Cash $\left(\$34\times 900\right)$		30,600
	Common Stock, no par			30,600
	(To record issuance of no par common stock)
April 13	Land $\left(\$33\times 400\right)$		13,200
	Common Stock, no par			13,200
	(To record exchange of no par common stock for land)
June 1	Treasury Stock: Common		18,000
	Cash $\left(500\times \$36\right)$			18,000
	(To record reacquisition of common stock)
October 19	Cash		27,000
	Common Stock (1)			15,750
	Preferred Stock			10,000
	Additional Paid-in Capital on Preferred Stock			1,250
	(To record issuance of common and preferred stock)
November 16	Cash $\left(\$358\times 500\right)$		19,000
	Treasury Stock: Common			18,000
	Additional Paid-in Capital from Treasury Stock			1,000
	(To record sale of treasury stock)
December 31	Retained Earnings $\left[\left(1,900+350+100\right)\times \left(0.08\times \$100\right)\right]$		18,800
	Cash			18,800
	(To record payment of preferred dividends)
December 31	Retained Earnings $\left[\left(8,000+900+400+500\right)\times \$2\right]$		19,600
	Cash			19,600
	(To record payment of common dividends)

Table (1)

Working note 1: Calculate the allocation of proceedings:

Particulars	Calculations	Amount ($)
Common stock	$\frac{\left(\$35\times 500\text{shares}\right)}{\left[\left(\$35\times 500\text{shares}\right)+\left(100\times \$125\right)\right]}\times \$27,000$	$15,750
Preferred stock	$\frac{\left(\$125\times 100\text{shares}\right)}{\left[\left(\$35\times 500\text{shares}\right)+\left(100\times \$125\right)\right]}\times \$27,000$	$11,250
		$27,000

Table (2)

To determine

Prepare the contributed capital section of Corporation Y as on December 31, 2016.

Explanation of Solution

Note: There is no information available to prepare Contributed capital part of Corporation Y as on December 31, 2016. Based on the given information and requirements it is possible to prepare Contribution capital section for the year 2019. Hence, it is prepared for the year 2019.

Prepare the contributed capital section of Corporation Y as on December 31, 2019:

Corporation Y
Shareholders' Equity
December 31, 2016
Contributed capital:
Preferred stock, 8%, $100 par (6,000 shares authorized; 2,350 shares issued, and outstanding)	$235,000
Common stock, no par (24,000 shares authorized, 9,800 shares issued and outstanding)	243,550
Additional paid-in capital on preferred stock	24,150
Additional paid-in capital from treasury stock	1,000
Total contributed capital	$503,700

Table (3)

Therefore, the total contributed capital is $503,700.