Seles Corporations Charter Authorized Issuance Of 100,000 Sh
Seles Corporations Charter Authorized Issuance Of 100000 Shares Of
Seles Corporation’s charter authorized issuance of 100,000 shares of $10 par value common stock and 50,000 shares of $50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others.
1. Issued a $10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for $106 a share.
2. Issued 500 shares of common stock for equipment. The equipment had been appraised at $7,100; the seller’s book value was $6,200. The most recent market price of the common stock is $16 a share.
3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to $10,800. The common had been selling at $14 and the preferred at $65.
4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of $16 per share; the equipment has a fair value of $6,500.
Paper For Above instruction
Introduction
The issuance of shares in a corporation is a fundamental activity that impacts the company's capital structure, ownership distribution, and financial statements. Proper recording and understanding of different issuance transactions are essential for accurate financial reporting. This paper details the journal entries involved in four independent stock issuance transactions for Seles Corporation, a company authorized to issue common and preferred stock. Each transaction involves unique considerations about valuation, market prices, and the nature of the compensation for assets or liabilities.
Transaction 1: Issuance of Bond and Bonus Preferred Share
In the first transaction, Seles Corporation issued a $10,000 bond payable at par and awarded a preferred stock share valued at $106 as a bonus. The issuance of bonds at par involves a straightforward debit to cash and a credit to bonds payable, totaling $10,000. The bonus preferred stock is issued at its market value as a non-cash benefit, recognized at $106 per share.
The journal entry is as follows:
Debit: Cash $10,000
Credit: Bonds Payable $10,000
Debit: Preferred Stock (bonus) $106
However, the preferred stock bonus is recognized as part of stockholders’ equity. Since only one share is issued, the preferred stock account increases by the par value, which is $50. The excess amount ($106 - $50 = $56) is recorded as additional paid-in capital related to preferred stock.
Therefore:
Debit: Preferred Stock, $50 (par value)
Debit: Additional Paid-in Capital – Preferred Stock, $56
Credit: Stockholders’ Equity (or directly to contributed capital, as per accounting standards)
This capturing of the value ensures proper reflection of equity issuance, and the bonus share increases the preferred stock account at its par value, with additional paid-in capital capturing the excess over par.
Transaction 2: Issuance of Common Stock for Equipment
In this case, 500 shares of common stock are issued in exchange for equipment appraised at $7,100. The common stock has a market price of $16 per share, totaling a market value of 500 × $16 = $8,000. The issuance should be recorded at the fair value of the consideration received or the fair value of the stock issued; since the stock’s fair value is objectively determinable and more reliable, the transaction is valued at $8,000.
The journal entry:
Debit: Equipment $7,100
Debit: Additional Paid-in Capital – Common Stock ($8,000 - $7,100 = $900)
Credit: Common Stock (par value 500 × $10 = $5,000)
Credit: Paid-in Capital in Excess of Par – Common Stock (Difference) $3,000
The common stock is credited at its par value (500 shares × $10 = $5,000). The excess of the fair value of the equipment over the stock’s par value ($8,000 - $5,000 = $3,000) is recognized as additional paid-in capital.
Transaction 3: Lump Sum Issuance of Common and Preferred Stocks
Seles Corporation issued 375 shares of common and 100 shares of preferred stock for $10,800. The market prices are $14 for common and $65 for preferred, and the issuance is a lump sum.
Total estimated value:
- Common stock: 375 shares × $14 = $5,250
- Preferred stock: 100 shares × $65 = $6,500
Total market value: $11,750
The allocation of the lump sum proceeds is based on the relative fair values:
- Common: ($5,250 / $11,750) × $10,800 ≈ $4,836
- Preferred: ($6,500 / $11,750) × $10,800 ≈ $5,964
The amounts assigned to each class of stock are then recorded:
Debit: Cash $10,800
Credit: Common Stock, 375 × $10 par = $3,750
Credit: Paid-in Capital in Excess of Par – Common $1,086
Credit: Preferred Stock, 100 × $50 par = $5,000
Credit: Paid-in Capital in Excess of Par – Preferred $964
Rationale:
- Common stock is credited at par value ($3,750).
- Preferred stock at par value ($5,000).
- Differences are credited to the respective paid-in capital accounts.
Transaction 4: Issuance of Stock for Equipment
Finally, 200 shares of common and 50 shares of preferred are issued for equipment valued at $6,500. The fair value per share is $16 for common stock:
- Common: 200 shares × $16 = $3,200
- Preferred: 50 shares × $50 = $2,500
Total fair value: $5,700
The total value of the assets received ($6,500) exceeds the calculated stock value, but for accounting, the issuance is recorded at the fair value of the consideration received, i.e., equipment valued at $6,500.
The journal entry:
Debit: Equipment $6,500
Credit: Common Stock (200 × $10) = $2,000
Credit: Paid-in Capital in Excess of Par – Common ($6,500 - $2,000) = $4,500
Credit: Preferred Stock (50 × $50) = $2,500
Credit: Paid-in Capital in Excess of Par – Preferred ($6,500 - $2,500) = $4,000
Note: The total value consideration is allocated between stock at par and paid-in capital, acknowledging the difference as additional paid-in capital.
Conclusion
The accurate recording of stock issuance transactions requires understanding of stock par values, fair value considerations, and the appropriate recognition of additional paid-in capital. In each transaction, the issuance impacts both the equity accounts and reflects the company's growth, asset acquisitions, or liabilities converted into equity. Proper journal entries ensure transparent financial reporting and compliance with accounting standards. As demonstrated, different types of transactions—whether involving cash, assets, or stock bonuses—are systematically accounted for to preserve the integrity of the financial statements of Seles Corporation.
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