Question

Pennington Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $310,000. The proceeds allocated to the preferred stock is:

a. $169,091
b. $140,909
c. $150,000
d. $124,000

Answer 1

The proceeds allocated to the preferred stock is $169,091.

Step-by-step explanation:

When a company issues stocks at different prices, the proceeds need to be allocated to each class of stock based on their fair value. In this case, the company issued 6,000 shares of common stock and 9,000 shares of preferred stock for a lump sum of $310,000. To calculate the proceeds allocated to the preferred stock, we need to determine the total value of the preferred stock and the total value of all the issued stock.

The total value of the preferred stock is calculated by multiplying the number of shares by the fair value per share: 9,000 shares x $20 = $180,000. The total value of all the issued stock is calculated by multiplying the number of shares by the fair value per share: 6,000 shares x $25 = $150,000.

To determine the proceeds allocated to the preferred stock, divide the total value of the preferred stock by the total value of all the issued stock and multiply by the lump sum: ($180,000 / $150,000) x $310,000 = $369,091. Therefore, the proceeds allocated to the preferred stock is $169,091 (option a).