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FAR - Financial Accounting & Reporting (Forum Locked Forum Locked)
 CPAnet Forum : FAR - Financial Accounting & Reporting
Subject Topic: Concept - Additional paid in capital (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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CPA_Starter
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Posted: 30 Jun 2009 at 02:13 | IP Logged  

Hi..
I use becker and i am confused in this example.. can anyone help me on
this?
problem:

The condensed balance sheet of Adams & Gray, a partnership, at
December 31, 1992, follows:

Current assets     $     ; 250,000
Equipment (net)         & nbsp;30,000
                    Total& nbsp;  assets     $      ; 280,000

Liabilities     $       20,000
Adams, capital          ; 160,000
Gray, capital          ; 100,000
                    Total liabilities and capital     $   &nbs p; 280,000

On December 31, 1992, the fair values of the assets and liabilities were
appraised at $240,000 and $20,000, respectively, by an independent
appraiser. On January 2, 1993, the partnership was incorporated and
1,000 shares of $5 par value common stock were issued. Immediately
after the incorporation, what amount should the new corporation report
as additional paid-in capital?

Answer:
$ 275000

Additional paid-in capital would be credited for the difference between
the fair value of the net assets ($240,000 assets - $20,000 liabilities) and
the par value of the common stock issued (1,000 shares ´ $5 par value),
or $220,000 - $5,000 = $215,000. The journal entry would be:

Assets (fair value)     240,000
                         Liabilities (fair value)          &nbs p;         &nbs p;  20,000
                         Common stock (1,000 ´ $5)         &nb sp;      5,000
                           Additional paid-in capital          ;  215,000

How can such issue be additional paid in capital??? APIC is generally
contributed capital in excess of par or stated value. Sush issue will be
outstanding capital.. right?


------------
BEC - 77
FAR - 07/14/09





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rumboj
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Posted: 30 Jun 2009 at 02:28 | IP Logged  

You said the answer was 275,000 initially but I'm guessing you meant 215,000 as the journal entry indicates.  Oustanding capital includes common stock and APIC so 215,000 seems correct to me.  The capital of the incorporated business must equal FV of assets minus FV of liabilities (240000-20000=220000).  Entries to the common stock account must always be at par value, hence the 5000.  Any remaining difference goes to APIC.

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Zeratul
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Posted: 30 Jun 2009 at 07:40 | IP Logged  

To add to the explanation, it makes more sense if you recall that shareholder's equity is always a residual interest in the net assets of a corporation. Once the partnership incorporates, the fair value of the assets and liabilities would be the basis for valuation (since book value is a significantly irrelevant figure for this purpose), and anything left over on the right side of the equation would have to go to equity (A=L+SE). From a legal and accounting standpoint, it's a whole new entity. Since the company just incorporated, there aren't going to be any retained earnings; the residual interest would therefore be considered to be the fair value of the shares.

The rest of it is just basic S/E accounting.

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CPA_Starter
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Posted: 09 Jul 2009 at 02:26 | IP Logged  

Thanks both.. i got it

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