3. April, Inc. issued 4000 shares of preferred stock for $240,000. The stock has

Question

3. April, Inc. issued 4000 shares of preferred stock for $240,000. The stock has a par value of $60 per share. The journal entry to record this transaction would ________.

A) credit Cash $240,000, debit Preferred Stock—$60 Par Value $4000, and debit Paid-In Capital in Excess of Par—Preferred $236,000 B) debit Cash $240,000, credit Preferred Stock—$60 Par Value $4000, and credit Paid-In Capital in Excess of Par—Preferred $236,000 C) credit Cash $240,000 and debit Preferred Stock—$60 Par Value $240,000 D) debit Cash $240,000 and credit Preferred Stock—$60 Par Value $240,000

4. Which of the following occurs when a corporation's board of directors declares a 10% stock dividend? A) Stock Dividends will be credited for the new shares times the current market value of the stock. B) Stock Dividends will be debited for the new shares times the current market value of the stock. C) Stock Dividends will be debited for the new shares times the par value of the stock. D) Stock Dividends will be credited for the new shares times the par value of the stock.

5. On December 31, 2018, Globe Company borrowed $500,000 by signing a five-year, 8% note payable. The note is payable in five yearly installments of $100,000 plus interest, due at the end of every year beginning on December 31, 2019. Which portion is classified as the long-term portion of Notes Payable at December 31, 2018?

Explanation / Answer

Answers

The correct journal Entry is Option D
4000 preferred stocks are issued at $240000 which is $60 per share. Hence, the shares are issued at PAR only. Cash will be debited and Preferred stock will be credited by $240000

The correct answer is Option B
Stock dividends gets DEBITED for the new shares multiplied by the current market value.

Example: existing 2000 common stock at $10 par. Market price $15. 10% Stock dividend = 2000 shares x 10% = 200 shares x $15 = $3,000 (Amount by which stock dividend is debited by)

Note’s value = $500000 on Dec 31, 2018.
Some of this value will be repaid in coming 2019, this part that will be repaid in 2019 along with first installment of $100000 will be classified as ‘’Current Liability”. The remaining part will be classified as “Long Term portion of Notes Payable” for Dec 31, 2018.

First Installment to be paid on Dec 31, 2019 = $100000
Interest expense included in that $100000 = 500000 x 8% = $40,000
Hence, liability portion that is repaid with $100000 = 100000 – 40000 = $60,000 will be repaid in 2019.

For Dec 31, 2019 Balance Sheet:

Current Liability:
Notes Payable (short term part) = $60,000

Long Term Liability:
Notes Payable (long term part) = $440,000 [500000 – 60000]

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