ABC Inc.issued 1,000 common shares and 3,000 preferred shares for a lump sum of $25,000.The fair market value of each share on the date of issue was $6 per common share and $8 per preferred share.How much of the proceeds received should be allocated to the preferred shares on the date of issue?

Question

Quizplus · Accepted Answer

To allocate the total lump sum of $25,000 between the common and preferred shares, we need to first determine the total fair market value of each type of share issued. 
1000 common shares x $6 per share = $6,000 
3000 preferred shares x $8 per share = $24,000

Therefore, the total fair market value of all shares issued is $30,000 ($6,000 + $24,000).

To determine the amount of proceeds that should be allocated to the preferred shares, we can use the following proportion:

Preferred share fair market value / Total fair market value of all shares issued = Percentage of total proceeds allocated to preferred shares

$24,000 / $30,000 = 0.8

So, 80% of the total proceeds should be allocated to the preferred shares: 
$25,000 x 0.8 = $20,000

Therefore, the answer is B, $20,000.

ABC Incissued 1,000 Common Shares and 3,000 Preferred Shares for a a Lump