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Parker Corporation has issued 2,000 ordinary shares and 400 preference shares for a lump
sum of $72,000 cash.
Instructions
(a) Give the entry for the issuance assuming the par value of the ordinary shares was $5 and
the fair value $30, and the par value of the preference shares was $40 and the fair value
$50. (Each valuation is on a per share basis and there are ready markets for each class of
shares.)
(b) Give the entry for the issuance assuming the same facts as (a) above except the preference
shares have no ready market and the ordinary shares have a fair value of $25 per share.
Solution 1
(a) Cash ............................................................................................. 72,000
Share Capital—Ordinary ................................................. 10,000
Share Premium—Ordinary ............................................... 44,000
Share Capital—Preference ............................................. 16,000
Share Premium—Preference .......................................... 2,000
(ordinary $30 × 2,000 $60,000
preference $50 × 400 20,000
$80,000 fair value
60/80 × $72,000 = $54,000 ordinary
20/80 × $72,000 = 18,000 preference
$72,000)
Solution 2
(a) Treasury Shares .......................................................................... 145,000
Cash ................................................................................ 145,000
Instructions
Assuming that all of the company’s retained earnings are to be paid out in dividends on
12/31/16 and that preference dividends were last paid on 12/31/14, show how much the
preference and ordinary shareholders should receive if the preference share are cumulative and
fully participating.
*Solution 3
Preference Ordinary Total
Dividends in arrears (6% of $400,000) $24,000 $ — $ 24,000
Current year’s dividends 24,000 36,000 60,000
Participating dividend (3%)
[($30,000 ÷ $1,000,000) x $400,000] 12,000 18,000 30,000
$60,000 $54,000 $114,000