On July 1, 2020, Nehan Corp. issued 4,000 of its no par common shares and 8,000 of its no par preferred shares for a lump sum of $ 200,000. At this date Nehan's common shares were selling for $ 24 per share and the preferred shares for $ 18 per share. Using the relative fair value method, the amount of the proceeds allocated to the preferred shares account should be
A) $ 100,000.
B) $ 110,000.
C) $ 120,000.
D) $ 72,000.

Question

Quizplus · Accepted Answer

The relative fair value method requires the allocation of the lump sum proceeds to each class of shares based on their proportionate fair value.

Total fair value of common shares = 4,000 × $24 = $96,000 
Total fair value of preferred shares = 8,000 × $18 = $144,000

Total fair value = $96,000 + $144,000 = $240,000

Allocation to preferred shares = ($144,000/$240,000) × $200,000 = $120,000.

Therefore, the amount of the proceeds allocated to the preferred shares account should be $120,000.