E15-5 (Lump-Sum Sales of Stock with Preferred Stock) Dave Matthew Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000. Instructions (a) Prepare the journal entry for the issuance when the market price of the common shares is $165 each and market price of the preferred is $230 each. (Round to nearest dollar. (b) Prepare the journal entry for the issuance when only the market price of the common stock is known and it is $170 per share.

See explanation section

Explanation:

Requirement A

Journal entry for the issuance when the market price of the common shares is $165 each -

Debit Cash (500 shares, $165 market value) $82,500

Credit Common Stock (500 shares, $10 par value) $5,000

Credit Paid-in-capital in excess of Par/Additional paid-in-capital, Common stock (500 shares, $165 - $10 = $155 per share in excess of par) $77,500

Journal entry for the issuance when the market price of the preferred share is $230 each -

Debit Cash (100 shares, $230 market value) $23,000

Credit Preferred Stock (100 shares, $100 par value) $10,000

Credit Paid-in-capital in excess of Par/Additional paid-in-capital, Preferred stock (100 shares, $230 - $100 = $130 per share in excess of par) $13,000

Requirement B

Journal entry for the issuance when only the market price of the common stock is $170 per share -

Debit Cash (500 shares, $170 market value) $85,000

Credit Common Stock (500 shares, $10 par value) $5,000

Credit Paid-in-capital in excess of Par/Additional paid-in-capital, Common stock (500 shares, $170 - $10 = $160 per share in excess of par) $80,000

As preferred stock's market price is not given, the par value becomes the market value for the preferred stock. The journal to entry to record preferred stock -

Debit Cash (100 shares, $100 market value) $10,000

Credit Preferred Stock (100 shares, $100 par value) $10,000