Question

Dave M. Company issues 500 shares of $10 par value Common Stock and 100 shares of $40 par value Preferred Stock as a basket for a lump sum of $105,000. Total transaction costs paid to complete the sale was $5,000. Common Stock of the company was selling for $198 per share in the market that day and Preferred Stock was selling for $110 per share in the market that day.
Required:
a. Prepare a table showing how the sale price is allocated between the Common Stock and the Preferred Stock.
b. Prepare the journal entry to record the basket sale of the two stocks.

Answer 1

Answer:

a.

Allocation

Common Stock $94,500

Preferred Stock $10,500

b.

Journal Entry

Cash _____________________________$105,000  

Common stock _____________________ $5000

Paid-in capital in excess of par - Common _$89,500

Preferred stock _____________________$4,000

Paid-in capital in excess of par - Preferred _$6,500  

Explanation:

a.

First, we need to calculate the Market value of both stock using the foloowinf formula

Market value = Numbers of shares x Market value per share

Market value of common stock = 500 x $198 = $99,000

Market value of preferred stock = 100 x $110 = $11,000

Total value = $99,000 + $11,000 = $110,000

Now calculate the weight of each sock

Weight of common stock  $99,000 / $110,000 = 0.90

Weight of preferred stock = $11,000 / $110,000 = 0.10

Allocation of the sale price is as follow

Allocated sale price = Weight of Stock x Sale price

Allocated sale price of common stock = $105,000 x 0.90 = $94,500

Allocated sale price of common stock = $105,000 x 0.10 = $10,500

b.

Common Sock is recorded separately as par value and paid-in capital excess of par as follow

Common Stock ( Par Value ) = 500 x $10 = $5,000

Common Stock ( Excess of Par ) = $94,500 - $5,000 = $89,500

Preferred Stock ( Par Value ) = 100 x $40 = $4,000

Preferred Stock ( Excess of Par ) = $10,500 - $4,000 = $6,500