Question

Lockhart Company issues 10,000 shares of its $1 par value common stock having a market value of $50 per share and 3,000 shares of its $15 par value preferred stock having a market value of $100 per share for a lump sum of $750,000. The proceeds allocated to the common stock is?

1) $450,000
2) $468,000
3) $500,000
4) $705,000

Answer 1

The proceeds allocated to the common stock when Lockhart Company issues shares for a lump sum are $468,750, which is closest to option 2) $468,000.

Step-by-step explanation:

The proceeds allocated to the common stock when Lockhart Company issues shares for a lump sum can be found using the proportional method by allocating the lump sum based on the relative fair market values of the common and preferred stocks.

We calculate the market value portions by multiplying the number of each type of share by its market value, which are:

• Common stock: 10,000 shares x $50 per share = $500,000
• Preferred stock: 3,000 shares x $100 per share = $300,000

The total market value is $500,000 (common) + $300,000 (preferred) = $800,000.

We then use these proportions to allocate the lump sum of $750,000:

Common stock proportion = $500,000 / $800,000 = 5/8

Proceeds allocated to common stock = 5/8 of $750,000 = $468,750

The nearest answer choice to $468,750 is option 2) $468,000.