The Sneed Corporation issues 10,000 shares of $50 par value preferred stock for cash at $75 per share. The entry to record the transaction will consist of a debit to Cash for $750,000 and a credit or credits to:
Preferred Stock for $500,000 and Paid-In Capital in Excess of Par—Preferred Stock for $250,000
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There are two parts to this transaction: recording the issuance of preferred stock and recording the difference between the par value and the issuance price.
1. To record the issuance of preferred stock:
Debit - Cash: $750,000
Credit - Preferred Stock (10,000 shares x $50 par value per share): $500,000
2. To record the difference between the par value and the issuance price:
Credit - Additional Paid-in Capital on Preferred Stock: $250,000
So, the final entry to record the transaction will consist of a debit to Cash for $750,000, a credit to Preferred Stock for $500,000, and a credit to Additional Paid-in Capital on Preferred Stock for $250,000.
To determine the credit entry or entries required to record the transaction, we need to consider the details of the preferred stock issued.
Preferred stock is a type of equity security that represents ownership in a corporation. It typically carries certain rights and preferences, such as preferred dividend payments and the possibility of being repaid before common stockholders in the event of liquidation.
In this case, the Sneed Corporation issued 10,000 shares of $50 par value preferred stock for cash at $75 per share. We know that the par value of the preferred stock is $50 per share, but it was sold at a price higher than par value, at $75 per share.
To calculate the total value of the preferred stock issued, we multiply the number of shares issued (10,000 shares) by the issue price per share ($75). Therefore, the total value of the preferred stock issued is $750,000 (10,000 shares × $75 per share).
Since the company received $750,000 in cash from selling the preferred stock, we would debit the Cash account for this amount.
The credit entry or entries depend on the specific details of the preferred stock issued. Here are a few possibilities:
1. Preferred Stock: We can credit the Preferred Stock account for the par value component of the preferred stock. In this case, the credit to Preferred Stock would be $500,000 (10,000 shares × $50 par value per share).
2. Additional Paid-in Capital: If the issuance price per share ($75) exceeds the par value ($50) of the preferred stock, the difference represents additional capital received from investors. We would credit the Additional Paid-in Capital account for this amount. In this case, the credit to Additional Paid-in Capital would be $250,000 (10,000 shares × ($75 - $50)).
3. Dividends Payable or Dividend in Arrears: If the preferred stock carries a cumulative dividend feature and any dividends are in arrears, we may need to credit the Dividends Payable or Dividend in Arrears account. This depends on the specific terms and conditions of the preferred stock.
The specific credit entries may vary depending on the specifics of the preferred stock issuance and the accounting practices of the company. As always, it is critical to consult the company's financial statements and/or discuss with a professional accountant to ensure accurate recording of transactions.