Question

"Prepare journal entries to record each of the following four separate issuances of stock. a. A corporation issued 9,000 shares of $20 par value common stock for $216,000 cash. b. A corporation issued 4,500 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $48,500. The stock has a $1 per share stated value. c. A corporation issued 4,500 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $48,500. The stock has no stated value. d. A corporation issued 2,250 shares of $100 par value preferred stock for $273,500 cash."

Answer 1

Answer:

Journal entries:

a.  Cash  Dr $216000

              share premium  Cr $36000

              Capital                Cr $180000

b.  Retained earnings   Dr  $48500

                     Common Stock  Cr  $44000

                      paid-in capital   Cr   $4500

c. Retained earnings    Dr  $48500

                      Common Stock  Cr  $48500

d.  Cash   Dr $273500

               Preferred stock  Cr 225000

               paid-in capital     Cr 48500    

Explanation:

In transaction a the corporation has issued 9000 shares at a par value of $20 so the capital raised should be $180000 (i.e $20 × 9000) but the total amount of cash received is $216000 (i.e $36000 more than the capital amount), this implies that the corporation has issued the shares at a premium, that's why the amount representing the par value is credited to the capital account and the rest is transferred to the premium account.    

In transaction b the corporation has issued no-par common stock to promoters in exchange for their efforts which means the corporation won't receive any financial consideration in return for the issue of these common stock. That's why corporation's retained earnings are reduced (credited).  As a rule for non-par common stock, if No-par common stock with stated value are issued then the common stock account is credited up to the amount of the par value and the additional amount in excess of the par value is credited to the paid-in capital.

In transaction c the corporation has similarly issued no-par common stock (the difference here is, that these no-par common stock have no stated value). Therefore the estimated worth of the common stock is fully credited to the common stock account and retained earnings are debited because the corporation is not receiving any sort of consideration (i.e cash) in exchange for shares.

In transaction d the corporation has issued 2250 preferred stock at a par value of $100, the value of preferred stock at par value should be $225,000 but it has received $273500 in cash, therefore it implies the excess of funds received is the premium and that's why it's credited and  treated as paid-in capital.