Violet Corporation issues 1,200 shares of $150 par value preferred stock at a price of $200 per share on December 31. It attaches a warrant to each share of stock that allows the holder to purchase one share of $20 par common stock at $50 per share. Given that the portion of the proceeds attributable to thepreferred stocks total $230,303 and the portion attributable to the common stocks warrants total $9,697, what journal entry would Violet make to allocate the $240,000 ($200 1,200) issuance price?

The journal entry to record the preferred stock, additional paid in capital on preferred stock and the warrants would be as under:

Dr Cash Account $240,000

Cr Preferred Stock                  $180,000

Cr Additional Paid In Capital   $50,303

Cr Common Stock Warrants     $9,697

The journal entry recording of warrant value would be:

Dr Cash Account                      $60,000

Dr Common Stock Warrants     $9,697

Cr Common Stock                                  $24,000

Cr Additional Paid In Capital                 $45,697

Explanation:

The Preferred stock par value collection is calculated as under:

Preferred Stock = $150 Par value * 1,200 per share = $180,000

The additional paid in capital on preferred stock can be calculated by taking the difference between the amount received $230,303 and the par value of 1200 shares.

Additional Paid In Capital on Preferred Stock = $230,303 - $180,000

Additional Paid In Capital on Preferred Stock  = $50,303

The journal entry to record the preferred stock, additional paid in capital on preferred stock and the warrants would be as under:

Dr Cash Account $240,000

Cr Preferred Stock                  $180,000

Cr Additional Paid In Capital   $50,303

Cr Common Stock Warrants     $9,697

Now we will come to warrant's accounting treatment.

First of all, we will find common stock value which is as under:

Common stock = 1200 shares * $20 = $24,000

The additional Paid in Capital for common stock is as under:

Additional Paid in Capital for Common Stock = 1200 * $50 - $24,000 + 9,697 = $36,000

And the total cash received is $60,000 ($50 * 1200 shares) for warrants.

The journal entry recording of warrant value would be:

Dr Cash Account                      $60,000

Dr Common Stock Warrants     $9,697

Cr Common Stock                                  $24,000

Cr Additional Paid In Capital                 $45,697