Answer:
Lindsey Hunter Corporation:
a) Journal entry to record item 1:
Debit Cash Account with $225,000
Credit Common Stock with 25,000
Credit APIC Account with $200,000
To record the issue of 5,000 shares of $5 par value at $45 per share
b) Journal entry to record item 2:
Debit Land Account with $50,000
Credit Common Stock with $5,000
Credit APIC Account with $45,000
To record the issue of 1,000 shares $5 par value at $50 per share.
c) Journal entry to record item 3:
Debit Treasury Stock with $21,500
Credit Cash with $21,500
To record the purchase of 500 treasury shares at $43 per share, using the cost method.
Explanation:
a) The costs related to the issuance of the stock totaling $7,000 had been deducted before arriving at $45 issue price. These costs include attorney, accountants, and underwriting fees. Companies have two options to treat these costs. One is to treat them as organization costs and expense them accordingly or apply the costs to reduce the paid-in capital. The later is the method elected by Lindsey Hunter and it is alright.
b) Company stock can be issued for cash or other assets, as in question 2. The treatment is similar. This time, Land is increased instead of cash. The most important issue is the price at which the land is appraised and not the market value of the stock. The difference between par value and issue value is credited or debited to the APIC account.
c) The APIC account represents "Additional Paid-in Capital" also described as Share Premium Account. It is the excess of the issue value over the par value.
d) Treasury stock is company stock that was formerly outstanding and now bought back from stockholders. It is a reduction of the Equity. It is created as a contra account. There are two methods of treating treasury stock.
One method accounts for treasury stock at cost while the second method accounts for it at par. The difference is that when it is accounted for at cost, the repurchase value is debited to the Treasury account while the credit entry goes to the Cash account.
On the other hand, when it is accounted for at par, the par value is debited to the Treasury account while the difference between par and repurchase value is debited or credited to the APIC account. The credit entry goes to the Cash account, as always.
