Question

Exercise I: Coke Corporation issued 333 shares of 556 par value common stock and 133 shares of $58 par value preferred stock for a lump sum of $38876. The common stock has a market value of 557 per share, and the preferred stock has a market value of $62 per share. Prepare the journal entry of allocating proceeds in two methods: 1. the proportional method and 2. the incremental method (in this case assume the value of the preferred stock is unknown).

Answer 1

1. Proportional method :- according to this method the lum sum amount will be devided in the ratio of the market value of security

Market value of Equity = 57*333 = 18981

Market value of Preference = 62*133 = 8246

Allocation to equity = lumsum amount*(Martket value of Equity/total market value)

= 38876*(18981/27227)

= 27101.97$

Allocation to Preference = 38876-27101.97 = 11774.03

Journal entry has given below:

27101.97 Cash a/c Dr. To common stock a/c To additional paid in capital A/c 186480 8453.97 11774.03 Cash a/c Dr. To preference stock a/c To additional paid in capital A/C 77141 4060.03

2. Incremental Method : this method is use full when Market value of one of the security is not given.

Market value of Equity = 18981

According to this method this value will be considered as allocated amount

Amount allocated to preference = 38876-18981 = 19895.

Journal entry has given below:-

18981 Cash a/c Dr. To common stock a/c To additional paid in capital A/C 18648 333 L 19895 Cash a/c Dr. To preference stock a/c To additional paid in capital A/C 77141 12181 L L

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