Essay on Ch 15

EXERCISE 15-1 (15-20 minutes) (a) Jan. 10 Cash (80,000 X 6) 480,000 Common Stock (80,000 X 5) 400,000 Paid-in Capital in Excess of Par 80,000 Mar. 1 Organization Expense 35,000 Common Stock (5,000 X 5) 25,000 Paid-in Capital in Excess of Par 10,000 (Note In the past, these costs would have been charged to Organization Costs) July 1 Cash (30,000 X 8) 240,000 Common Stock (30,000 X 5) 150,000 Paid-in Capital in Excess of Par 90,000 Sept. 1 Cash (60,000 X 10) 600,000 Common Stock (60,000 X 5) 300,000 Paid-in Capital in Excess of Par (60,000 X 5) 300,000 (b) Jan. 10 Cash (80,000 X 6) 480,000 Common Stock (80,000 X 3) 240,000 Paid-in Capital in Excess of Stated Value 240,000 Mar. 1 Organization Expense 35,000 Common Stock (5,000 X 3) 15,000 Paid-in Capital in Excess of Stated Value 20,000 July 1 Cash (30,000 X 8) 240,000 Common Stock (30,000 X 3) 90,000 Paid-in Capital in Excess of Stated Value 150,000 Sept. 1 Cash (60,000 X 10) 600,000 Common Stock (60,000 X 3) 180,000 Paid-in Capital in Excess of Stated Value 420,000 EXERCISE 15-2 (15-20 minutes) Jan. 10 Cash (80,000 X 5) 400,000 Common Stock (80,000 X 1) 80,000 Paid-in Capital Excess of SV Common 320,000 Mar. 1 Cash (5,000 X 108) 540,000 Preferred Stock (5,000 X 100) 500,000 Paid-in Capital in Excess of PV - Preferred 40,000 April 1 Land 80,000 Paid-in Capital in Excess of SV - Common 40,000 (In the past, these costs would have been charged to Organization Costs) Sept. 1 Cash (10,000 X 9) 90,000 Common Stock (10,000 X 1) 10,000 Paid-in Capital in Excess of SV - Common 80,000 Nov. 1 Cash (1,000 X 112) 112,000 Preferred Stock (1,000 X 100) 100,000 Paid-in Capital in Excess of PV - Preferred 12,000 EXERCISE 15-3 (10-15 minutes) (a) Land (62 X 25,000) 1,550,000 Treasury Stock (53 X 25,000) 1,325,000 Paid-in Capital from Treasury Stock 225,000 (b) One might use the cost of treasury stock. However, this is not a relevant measure of this economic event. Rather, it is a measure of a prior, unrelated event. The appraised value of the land is a reasonable alternative since the value of the asset acquired should preferably determine the issue price of the stock. However, it is an appraisal as opposed to a cash price. The trading price of the stock is probably the best measure of market value in this transaction. EXERCISE 15-4 (20-25 minutes) (a) 1. Bond Issue Costs (352,000 X 500/880) 200,000 Cash (880 X 9,600) 8,448,000 Bonds Payable 5,000,000 Common Stock 500,000 Paid-in Capital in Excess of Par 3,148,000 Assumes bonds properly priced and issued at par residual attributed to common stock which has a weak measure of market value. Investment banking costs 400 @ 880 352,000 allocate 5/8.8 to debentures and 3.8/8.8 to common stock. Bond portion is bond issue cost common stock portion is a reduction of paid-in capital. 2. Cash 8,448,000 Bond Issue Costs 195,556 Bond Discount (5,000,000 4,888,889) 111,111 Bonds Payable 5,000,000 Common Stock 500,000 Paid-in Capital in Excess of Par (plug) 3,254,667 8,800,000 X (5/9) 4,888,889 To Debentures 8,800,000 X (4/9) 3,911,111 To Common 352,000 X (5/9) 195,556 352,000 X (4/9) 156,444 (b) One is not better than the other. This question is presented to stimulate some thought and class discussion. EXERCISE 15-5 (10-15 minutes) (a) FMV of Common (500 X 165) 82,500 FMV of Preferred (100 X 230) 23,000 105,500 Allocated to Common 82,500/105,500 X 100,000 78,199 Allocated to Preferred 23,000/105,500 X 100,000 21,801 Total allocation (rounded to whole dollars) 100,000 Cash 100,000 Common Stock (500 X 10) 5,000 Paid-in Capital Excess of Par - Common (78,1995,000) 73,199 Preferred Stock (100 X 100) 10,000 Paid-in Capital Excess of Par - Preferred (21,80110,000) 11,801 (b) Lump-sum receipt

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