Question

Dave Matthew Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000. What portion of the proceeds is allocated to the 500 shares of common stock in this transaction if the market price of the common shares is $165 each and the market price of the preferred shares is $230 each?

Answer 1

Answer:

$78,199

Explanation:

If the market price of common stock is $165 per stock, then selling 500 common stocks should = $82,500

If the market price of preferred stock is $230 per preferred stock, then selling 100 preferred stocks should = $23,000

If we add both we would get $105,500. If we want to allocate the proceeds proportionally according to their market prices:

common stocks = ($82,500 / $105,500) x $100,000 = $78,199

preferred stocks = ($23,000 / $105,500) x $100,000 = $21,801

the journal entries should be:

• Dr Cash account 78,199
• Cr Common Stock account 5,000
• Cr Capital Paid-in Excess of Par Value (Common Stock) account 73,199

• Dr Cash account 21,801
• Cr Common Stock account 10,000
• Cr Capital Paid-in Excess of Par Value (Preferred Stock) account 11,801