 Hello and welcome to the session in which you would look at the proportional versus the incremental method for selling stocks. What is the big idea? Well, when do we need to learn about proportional versus incremental method is when we sell more than one type of security in a bundle for one price. Usually when we sell one stock, let's assume we are selling common stock. So when we sell common stock in return, we get cash pretty straightforward, easy transaction to record. Also, if we sell preferred stock alone and we'll get cash, what happened if we sell common stock plus preferred stock for one price? So they pay us one price, but we don't know whether this money, how much of the money should go to the preferred, how much of this money goes to the common. How should we split these amounts? Well, this is where the proportional versus the incremental method comes into play. There are two ways to allocate the funds. One is called the proportional method. And when do we use the proportional method? So you have to know what is the proportional method and when do we use it? We use it when the fair value of the securities are known. So we're going to use this method when we know the fair value of the common stock plus the fair value of the preferred stock. When do we use the incremental method? We use the incremental method when the fair value of one security is known and the other one is not. So for selling two securities, one, yes, we know the second security we don't. Under those circumstances, we use the incremental method. So we know the fair value of one, but not the fair value of the other. Now, the best way to illustrate this concept is to take a look at an example. Farhat lectures issued 500 shares of $1 power value common stock and 300 shares of $10 power value preferred stock for a lump sum of $16,000. What does that mean? This is what we were discussing. We got paid $6,000 and we sold both common stock and preferred stock. The common stock has a fair market value of 25. So we know the fair market value of the common and the preferred has a fair market value of 23. So we know the fair value of both. Well, if we know the fair value of both, we can use the proportional method. So let's see how are we going to split the $16,000 between the common stock and the preferred stock. Here's what we do. We're going to take the common stock fair market value 500 shares times $25. It's going to give us 12,500. The preferred stock 300 shares times $23. That's $6,900 together. They will give us a total fair value of $19,400. Now, what we need to do is find the relative fair value for each. Well, it's important to know how the relative fair value works because you will need this for any lump sum purchase or any contract later on when we're dealing with revenue. How to find the relative fair value of each revenue contract. We're going to take the common stock fair value divided by the total. So the common stock represents 64.43% of the deal. And we'll do the same thing for the preferred 6,900 divided by the total. And that's going to give us 35.57. Obviously, they have to add up to 100,000. Now it's easy. We're going to take the 16,000 and allocate from the 16,064.43 to the common, which comes up to $10,309. We're going to allocate of the 16,035.57 to the preferred. And that's going to give us $5,691 to the preferred stock. Now we are ready to book the journal entry. Cash is easy. We received 16,000 in total. The next thing we're going to credit is preferred stock. How much are we going to credit preferred stock? Well, we issued preferred stock 300 shares and $10 power value. We're going to credit preferred stock $3,000. And the preferred stock gets in total 56.91. If 3,000 is preferred stock, the remaining must be paid in capital preferred, which is 26.91. Then we're going to credit common stock. How much do we credit common stock? Well, common stock, we have 500 shares, $1 power value. That's going to give us $500. And the common stock in total, we're allocating to it 10,309. 500 is common stock. The remaining must be paid in capital and excess of commons, an excess of power value common stock. So this is how we prepare the journal entries. And this is how we perform the computation when we're using the proportional method. In the next example, we would look at the incremental method. Before we look at the incremental method, I would like to remind you whether you are a student or a CPA candidate. Take a look at my website, farhat-lectures.com. I am not a replaceable of your CPA prep course or your accounting course. My motto is helping accounting students and CPA candidate do well, especially CPA candidate pass the exam. My resources can help you understand the material better. Your risk is one month of subscription. Give it a try. I don't replace your CPA review course. You can keep that. I'm a useful addition. My accounting courses are aligned by chapter. I have exercises, true, false lectures that's going to help you understand the material better. My CPA modules are aligned with your Becker, Wiley, Roger and Gleam. So it's very easy to go back and forth between my material and your CPA review course. I give you access to 1,500 AICPA previously released questions with detailed solution in addition to thousands of CPA exam questions. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look at this example to illustrate the incremental method. It's the same example, farhat-lectures issue 500 shares, $1 par value and 300 shares of $10 par value for a lump sum of 16. We know the common stock has a market value of 23. The preferred stock is not known. Well, hopefully the incremental method make more sense because all we have to do is how much of the amount goes to the known and how much goes to the unknown. Well, common stock is 500 shares times $23. We know that for a fact. Therefore, the common should get 11,500. Well, if we received in total 16,000, we know for sure the common has a value of 11,500. It means the remainder, they paid us the extra for the preferred. Well, let's look at the journal entry now. We're going to debit cash 16,000, credit the preferred and credit the preferred stock 300, the 3,000, which is 300 shares times $10. And the preferred should get 4,500. Therefore, the remainder is 1,500 for the preferred. So this is the 4,500 for the preferred. The common is getting in total 11,500. 500 goes to the common stock. 500 shares times $1.00 per value is 500. And the remainder is 11,000 goes to the additional paid in capital. In total, that's the amount of 11,500. So hopefully by going through this illustration, we saw how the proportional versus the incremental method works. Now, the best way to learn this is to go to my website, farhatlectures.com, work multiple choice questions using additional resources to understand this concept. Don't shortchange yourself. Your education is important. My offer is pretty practically risk-free. You try me for a month, you like it, you keep it, you don't, you cancel, it's as simple as that. If you're studying for your CPA exam, don't shortchange yourself. It's a lifetime investment. The CPA exam is worth it. Good luck, study hard, and of course, stay safe.