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S. Lamar performed legal services for E. Garr. Due to a cash shortage, an agreement was reached whereby E. Garr. would pay S. Lamar a legal fee of approximately $12,000 by issuing 3,000 shares of its common stock (par $1). The stock trades on a daily basis and the market price of the stock on the day the debt was settled is $4.50 per share. Given this information, the journal entry for E. Garr. to record this transaction is:

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Answer:

The correct entries would as follows:

Dr Organization/legal fees(3000*$4.5)     $13,500

Cr Common stock($1*3000)                                    $3,000

Cr paid in capital in excess of par($4.5-$1)*3000)) $10,500

Explanation:

The total cost incurred has increased to $13,500 since the stock needs to be recorded at its fair value on the date of the agreement and the approximate fair value is the market price.

As a result,legal fees expenses is debited with $13,500 while the common stock account is credited with par value of $1 per share and the excess over par value of $3.5 is credited to paid in capital in excess of par.

Tundexi

Here, the total cost incurred has increased to $13,500 since the stock needs to be recorded at its fair value on the date of the agreement.

Thus, the legal fees expenses will be debited with $13,500 while the common stock account will be credited with par value of $1 per share and the excess over par value of $3.5 will be credited to paid in capital in excess of par.

The journal entry for E. Garr. to record this transaction is as follows:

Date  Account Titles                               Debit         Credit

           Organization/legal fees               $13,500

          (3000*$4.5)

                  Common stock                                         $3,000

                   ($1*3000)

                   Paid in capital in excess of par              $10,500

                   ($4.5-$1)*3000))  

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