Question

Wally, Inc. issued 500 shares of $10 par preferred stock at $83 a share. Each share had a warrant attached that allowed the holder to purchase one share of $5 par common stock for $15. Soon after the preferred stock was issued, the preferred stock was selling ex-rights for $64 a share, and the warrants were selling for $16 each. The entry to record the issuance of the preferred stock would include a

Answer 1

Answer: credit to Additional Paid -in Capital on Preferred Stock for $28,200

Explanation:

The journal entry will be:

Debit: Cash = $500 × 83 = $41500

Credit: Preferred stock = $5000

Credit: Additional paid in capital on preferred stock = $28200

Credit: Paid in capital - Common stock warrants = $8300

Note that Additional paid in capital on preferred stock was calculated as:

Amount allocated to preferred stock = (64/64+16) × 41500 = 33200

Less: Preferred stock face value = $500 × $10 = $5000

Additional paid in capital on preferred stock = $28200