Question

HK Company issues 4,000 shares of its $5 par value common stock having a fair value of $26 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $22 per share for a lump sum of $202,000. What amount of the proceeds should be allocated to the preferred stock?

a. $127,525
b. $112,983
c. $111,818
d. $90,481

Answer 1

To allocate the proceeds to the preferred stock, calculate the total fair value of the preferred stock shares and divide it by the total fair value of all shares. The amount allocated to the preferred stock should be $112,983.

Step-by-step explanation:

To allocate the proceeds to the preferred stock, we need to calculate the total fair value of the preferred stock shares and divide it by the total fair value of all shares. The fair value of the preferred stock shares is calculated as follows: 6,000 shares x $22 per share = $132,000.

Next, we calculate the total fair value of all shares by adding the fair value of the preferred stock and the fair value of the common stock: $132,000 (preferred stock) + $104,000 (common stock) = $236,000.

Finally, we allocate the proceeds to the preferred stock by multiplying the total lump sum by the ratio of the fair value of the preferred stock to the total fair value of all shares: $202,000 x ($132,000/$236,000) = $112,983.