Proportional and Incremental Methods for Recording Lump Sum Security Sales

The Proportional and Incremental methods are two ways companies can allocate the lump sum total earned on a sale of multiple securities.

General Scenario

ABC Corporation has issued 500 shares of both common and preferred stock in exchange for a lump sum of $100,000. This package included 350 shares of common stock which have a par value of $150 and a market value of $175 per share. The remaining 150 shares in the package were preferred stock which have a par value of $180 and a market value of $200 per share.

Record the transaction above in the appropriate journal entry.


Proportional Method

Step 1 – Reorganize the Information into a Clear and Usable Format

StockQuantityTotal Par Value
Fair Value Per Share
Common Stock350350Q x $150
= $52,500
350Q x $175
= $61,250
Preferred Stock150150Q x $180
= $27,000
150Q x $200
= $30,000

The company will allocate the $100,000 lump payment based on the % each security has of the total fair market value. This is generally the preferred method if the fair market value is available.

Step 2 – Calculate the Allocation Rate

SecurityFair Market ValueTotal% of Total
$91,250
350 Shares of Common Stock350Q x $175$61,25067.12%
150 Shares of Preferred Stock150Q x $200$30,00032.88%
TOTAL FAIR MARKET VALUE$91,250100%

Step 3 – Calculate the Allocation of the Lump Sum Payment

SecurityAllocation RateLump Sum PaymentAllocation of Lump Sum
350 Shares of Common Stock67.12%$100,000$67,120
150 Shares of Preferred Stock32.88%$100,000$32,880

Step 4 – Record the Journal Entry

The purpose of this journal entry is to allocate the cash received (asset) according to the proper sources of that cash. In this case, the cash originated from the sale of equity (preferred stock and common stock).

Assets (Δ+$100,000) = Liabilities (Δ0) + Equity (Δ+$100,000)
The Balance Sheet remains Balanced.

Based on the allocation assigned above, $67,120 of the sum is assigned to the common stock and the remaining $32,880 is assigned to the preferred stock for the total of $100,000 cash received.

When entering this sale of common or preferred stock into the balance sheet, there are five key accounts you may need. In addition to the cash and stock accounts, you will also need the APIC (Additional Paid in Capital) accounts to record any of the remaining allocation beyond the par value.

AccountExplanationDebitCredit
CashThe money received $100,000
Common StockThe Par Value of the common stock that was issued.$52,500
Preferred StockThe Par Value of the preferred stock that was issued.$27,000
Additional Paid in Capital in Excess of Par – CommonAllocated Value of Common Stock ($67,120) – Par Value already recorded$14,620
Additional Paid in Capital in Excess of Par – PreferredAllocated Value of Preferred Stock ($32,880) – Par Value already recorded$5,880

The entry below would also include the date and account numbers.

Accounts & ExplanationsDebitCredit
Cash$100,000
Common Stock $52,500
Preferred Stock $27,000
APIC in Excess of Par – Common$14,620
APIC in Excess of Par – Preferred$5,880
Record the sale of 350 shares of common stock
with a par of $150 and 150 shares of preferred
stock with a par of $180.
Total$100,000 (D)$100,000 (C)

Incremental Method

For this method to make sense, we will first modify our example above to remove some information that is no longer available to the corporation.


ABC Corporation has issued 500 shares of both common and preferred stock in exchange for a lump sum of $100,000. This package included 350 shares of common stock which have a par value of $150 and a market value of $175 per share. The remaining 150 shares in the package were preferred stock which have a par value of $180 and but where the fair market value is not available.

Record the transaction above in the appropriate journal entry.


The Incremental Method is convenient where one of the securities does not have a readily known fair market value. The steps and approach of the Incremental Method are the same as that of the Proportional Method except in Step 2 – identifying the allocation rate. This step involved the use of fair market values and thus something has to change when that information is not available.


Step 1 – Reorganize the Information into a Clear and Usable Format

The question has slightly changed so we need to re-identify the information that is available.

StockQuantityTotal Par Value
Fair Value Per Share
Common Stock350350Q x $150
= $52,500
350Q x $175
= $61,250
Preferred Stock150150Q x $180
= $27,000
?

Step 2 – Calculate the Allocation Rate

The company still wants to allocate the $100,000 lump payment but the situation is now more complex. Instead, they will use the fair market value of the securities where it is known, but then allocate according to the lump sum rather than the total fair market value.

*Note in the table below that the % in the Incremental Method is of the lump sum ($100,000) whereas the Proportional Method was calculating the % out of the total fair market value of the securities ($91,250).

SecurityFair Market ValueTotal% of Total
$100,000
350 Shares of Common Stock350Q x $175$61,25061.25%
150 Shares of Preferred Stock?$38,75038.75%
TOTAL LUMP SUM$100,000100%

Step 3 – Calculate the Allocation of the Lump Sum Payment

SecurityAllocation RateLump Sum PaymentAllocation of Lump Sum
350 Shares of Common Stock61.25%$100,000$61,250
150 Shares of Preferred Stock38.75%$100,000$38,750

Step 4 – Record the Journal Entry

Again, the cash originated from the sale of equity (preferred stock and common stock).

Assets (Δ+$100,000) = Liabilities (Δ0) + Equity (Δ+$100,000)
The Balance Sheet remains Balanced.

Based on the allocation assigned above, $61,250 of the sum is assigned to the common stock and the remaining $38,750 is assigned to the preferred stock for the total of $100,000 cash received.

Par value has not changed, so this will be the same as with the Proportional Method. It is simply the Additional Paid in Capital that will now change.

AccountExplanationDebitCredit
CashThe money received $100,000
Common StockThe Par Value of the common stock that was issued.$52,500
Preferred StockThe Par Value of the preferred stock that was issued.$27,000
Additional Paid in Capital in Excess of Par – CommonAllocated Value of Common Stock ($61,250) – Par Value already recorded$8,750
Additional Paid in Capital in Excess of Par – PreferredAllocated Value of Preferred Stock ($38,750) – Par Value already recorded$11,750

The entry below would also include the date and account numbers.

Accounts & ExplanationsDebitCredit
Cash$100,000
Common Stock $52,500
Preferred Stock $27,000
APIC in Excess of Par – Common$8,750
APIC in Excess of Par – Preferred$11,750
Record the sale of 350 shares of common stock
with a par of $150 and 150 shares of preferred
stock with a par of $180.
Total$100,000 (D)$100,000 (C)

Disclaimer: Nothing in this article is to be relied upon as legal or professional advice – it considers only general scenarios. Every individual faces a unique situation and requires personalized and targeted professional and legal assistance. If you are looking for advice, speak with a professional and find what applies directly to you. Blessing Associates is not liable for any results that arise should you rely solely upon information in this article.

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