Norton Company issues 4,000 shares of its $5 par value ordinary shares having a fair value of $25 per share and 6,000 shares of its $15 par value preference shares having a fair value of $20 per share for a lump sum of $192,000.What amount of the proceeds should be allocated to the preference shares?

Question

Quizplus · Accepted Answer

The total fair value of the shares is $160,000 (4,000 x $25 + 6,000 x $20). The excess of the lump sum received over the fair value of the shares is $32,000 ($192,000 - $160,000). 
To allocate the proceeds between the ordinary shares and preference shares, we find the proportion of the fair value of each type of share to the total fair value: 
- Proportion of ordinary shares: $100,000 / $160,000 = 5/8 
- Proportion of preference shares: $60,000 / $160,000 = 3/8 
Finally, we allocate the excess of proceeds to each type of share based on their proportion: 
- Excess allocated to ordinary shares: 5/8 x $32,000 = $20,000 
- Excess allocated to preference shares: 3/8 x $32,000 = $12,000 
Therefore, the amount allocated to preference shares is the sum of their fair value and their share of the excess: 
$6,000 x $20 + $12,000 = $132,000 
However, the question asks for the amount allocated to the preference shares only, which is $132,000 - ($6,000 x $15) = $104,727.

Norton Company Issues 4,000 Shares of Its $5 Par Value