Problem 4 - Accounting

Question

On February 20, Mudguard Corp., a carpet wholesaler, issued for cash 100,000 shares of no-par common stock (with a stated value of \(\$ 10\) ) at \(\$ 15\), and on April 30 , it issued for cash 4,000 shares of \(\$ 25\) par preferred stock at \(\$ 30\). a. Journalize the entries for February 20 and April 30 , assuming that the common stock is to be credited with the stated value. b. What is the total amount invested (total paid-in capital) by all stockholders as of April 30?

Step-by-Step Solution

Answer

Total paid-in capital as of April 30 is $1,620,000.

Step 1: Identify the Common Stock Transaction

On February 20, Mudguard Corp. issued 100,000 shares of no-par common stock with a stated value of $10 each, at a price of $15 per share. This means the excess of issue price over stated value is $5 per share.

Step 2: Journalize the Common Stock Issuance

Record the issuance of common stock by debiting Cash for the total amount received, crediting Common Stock for the stated value of the stock, and crediting Paid-in Capital in Excess of Stated Value for the remainder. The entry will be:Debit Cash for \(100,000 \times 15 = 1,500,000\).Credit Common Stock for \(100,000 \times 10 = 1,000,000\).Credit Paid-in Capital in Excess of Stated Value for \(100,000 \times 5 = 500,000\).

Step 3: Identify the Preferred Stock Transaction

On April 30, Mudguard Corp. issued 4,000 shares of $25 par preferred stock at $30 per share. This means the excess of issue price over par value is $5 per share.

Step 4: Journalize the Preferred Stock Issuance

Record the issuance of preferred stock by debiting Cash for the total amount received, crediting Preferred Stock for the par value of the stock, and crediting Paid-in Capital in Excess of Par Value for the remainder. The entry will be:Debit Cash for \(4,000 \times 30 = 120,000\).Credit Preferred Stock for \(4,000 \times 25 = 100,000\).Credit Paid-in Capital in Excess of Par Value—Preferred Stock for \(4,000 \times 5 = 20,000\).

Step 5: Calculate Total Paid-In Capital

To calculate the total paid-in capital, sum up all issued capital amounts including common stock, preferred stock, and any paid-in capital excess over par or stated value.Total Paid-In Capital = Common Stock \(1,000,000\) + Paid-in Capital in Excess—Common \(500,000\) + Preferred Stock \(100,000\) + Paid-in Capital in Excess—Preferred \(20,000\).Total Paid-In Capital = \(1,620,000\).

Key Concepts

Understanding Common Stock

Common stock represents ownership in a corporation. It is a type of stock that provides shareholders with voting rights and potential dividends. In the case of Mudguard Corp., they issued 100,000 shares of no-par common stock, which means these shares do not have a face value. Instead, they have a stated value of \(10, which is used for accounting purposes. Common stockholders are considered part-owners of the company, and their returns are based on the company's performance.When the common stock was issued at a price of \)15 per share, this was above the stated value, creating a premium. These shares were sold with a $5 excess per share over the stated value. This is recorded in financial statements as 'Paid-in Capital in Excess of Stated Value', demonstrating investor enthusiasm as they are willing to pay more than the stated value. Debiting cash for the total amount received and crediting both Common Stock and Paid-in Capital ensures accurate record-keeping.

Exploring Preferred Stock

Preferred stock is another form of company equity. It is a class of ownership with a higher claim on assets and earnings than common stock. Preferred stock generally does not offer voting rights but usually provides dividends at a fixed rate before common stockholders receive theirs.In the exercise, Mudguard Corp. issued 4,000 shares of preferred stock, each with a \(25 par value but sold at \)30 per share. The par value is the minimum value assigned to a share and is used for accounting purposes. Just like with common stock, if shares are sold above their par value, the excess is recorded as 'Paid-in Capital in Excess of Par Value'. This transaction reflects investor confidence, as they are prepared to pay above the par value to secure shares with more consistent returns.

Breaking down Paid-in Capital

Paid-in capital represents the total amount invested by shareholders in exchange for stock. It includes common and preferred stock and any amounts paid above the stated or par value. The journal entries for February 20 and April 30 demonstrate this concept in practice.Mudguard Corp.'s total paid-in capital incorporates several elements: the stated value of common stock, the par value of preferred stock, and the additional amounts paid over these values, which are recorded separately. For common stock, the paid-in capital in excess was \(500,000, while for preferred stock, it was \)20,000.Calculating the total is straightforward. Simply sum each component: common stock at stated value (\(1,000,000), the premium on common stock (\)500,000), preferred stock at par (\(100,000), and the premium on preferred stock (\)20,000). This totals to $1,620,000. Understanding how each piece of paid-in capital fits together helps elucidate its role as a marker of shareholder investment.